ON LIBERTY November 2003 Vol. 53, No. 10

F E A T U R E S 8 T h e Economics of Spam by Christopher Westley

10 Business Under German Inflation by Ludwig von Mises

14 Healers Under Siege by Doug Bandow

19 Understanding "Austrian" Economics , Part 2 by Henry Hazlitt

24 Rent-Seeking: A Primer by Sanford Ikeda

29 Grutter v. Bollinger: A Constitutional Embarrassment by George C. Leef

33 Global Warming: E x t r e m e Weather or E x t r e m e Prejudice? by Christopher Lingle

37 T h e Fallacies of Distributism by Thomas E. Woods, Jr.

4 FROM the PRESIDENT—-The Great German Inflation by Richard M. Ebeling ««««

17 THOUGHTS on FREEDOM—Oblivious to the Obvious by Donald J. Boudreaux

27 PERIPATETICS—Canute's Courtiers W e r e W r o n g by Sheldon Richman

35 OUR ECONOMIC PAST— H o w the Federal Government Got into the Ocean-Shipping Business by Robert Higgs

47 THE PURSUIT of HAPPINESS—-People Before Profits by Walter E. Williams

D E P A RT/V\ E N T S 2 Perspective—Weighing In by Sheldon Richman

6 Massive Foreign Aid Is the Solution to Africa's Ills? It Just Ain't So! by William Thomas

42 B o o k Reviews

A d a m Smith's Marketplace of Life by James R. Otteson, reviewed by Robert Batemarco; T h e Great T a x W a r s : Lincoln to Wi l son—The Fierce Battles over M o n e y and Power that Transformed the Nat ion by Steven R. Weisman, reviewed by Burton W . Folsom, J r . ; Pieces of Eight by Edwin Vieira, J r . , reviewed by George C. Leef; Terror i sm and Tyranny: Trampl ing Freedom, Justice, and Peace to Rid the W o r l d of Evil by James Bovard, reviewed by Richard M . Ebeling.

IDEAS O N L I B E R T Y

Published by The Foundation for Economic Education Irvington-on-Hudson, NY 10533 Phone: (800) 960-4FEE; (914) 591-7230 Fax: (914) 591-8910; E-mail: iol@fee.org FEE Home Page: www.fee.org

President: Richard M . Ebeling

Editor: Sheldon Richman

Managing Editor: Beth A. Hoffman

Editor Emeritus Paul L. Poirot

Book Review Editor George C. Leef

Charles W. Baird Donald J . Boudreaux Stephen Davies Burton W. Folsom, Jr .

Walte.

Columnists Robert Higgs Lawrence W. Reed Russell Roberts Thomas Szasz

Williams

Contributing Editors Doug Bandow Norman Barry Peter J . Boettke James Bovard Thomas J . DiLorenzo Joseph S. Fulda Bettina Bien Greaves John Hospers Raymond J . Keating Daniel B. Klein

Lawrence

Dwight R. Lee Wendy McElroy Tibor R. Machan Andrew P. Morriss Ronald Nash Edmund A. Opitz James L. Payne William H. Peterson Jane S. Shaw Richard H. Timberlake

H. White

Foundation for Economic Education Board of Trustees, 2003-2004

David Humphreys Chairman

Frederick C. Foote Vice Chairman

Henry M. Bonner Lloyd Buchanan Walter LeCroy Roy Marden Kris A. Mauren

Paige K. Moore Secretary

Dan Grossman Treasurer

Jane M. Orient, M.D. Tom G. Palmer Andrea Millen Rich Sally von Behren Guillermo M. Yeatts

Ideas on Liberty (formerly The Freeman: Ideas on Liberty) is pub­lished by The Foundation for Economic Education, Inc., Irvington-on-Hudson, NY 10533. FEE, established in 1946 by Leonard E. Read, is a non-political, educational champion of private property, the free market, and limited government. FEE is classified as a 26 USC 501(c)(3) tax-exempt organization.

Copyright © 2003 by The Foundation for Economic Education. Permission is granted to reprint any article in this issue, provided credit is given and two copies of the reprinted material are sent to FEE.

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Bound volumes of The Freeman and Ideas on Liberty are available from The Foundarion for calendar years 1972 to 2001. The magazine is available in microform from University Microfilms, 300 N. Zeeb Rd., Ann Arbor, MI 48106.

PERSPECTIVE

Weighing In Last spring the Arkansas legislature passed

a law requiring schools to compute each stu­dent's body mass (using the Body Mass Index, BMI) and record it on report cards. The BMI generates a number based on a per­son's height and weight, and is supposed to indicate something about one's health. How­ever, it's been criticized for not distinguish­ing between fat and muscle. A few years ago the government revised the index, and 30 million people woke up overweight. Accord­ing to the Center for Consumer Freedom (www.consumerfreedom.com/game_fatchart .cfm), the new BMI has these people as over­weight or obese: Sylvester Stallone, Arnold Schwarzenegger, Bruce Willis, Michael Jor­dan, and me (5 feet, 7 inches, and 158 pounds).

For Ideas on Liberty the issue, of course, is not the questionable validity of the BMI; it's the propriety of a law requiring agents of the state, government teachers, to keep track of the body mass of students who are com­pelled to attend school.

At FEE it's our policy not to tell the gov­ernment how to run its schools. We just think no one should be forced to attend or pay for them. Nevertheless, the Arkansas law is instructive. Education historians have long known that government did not get into edu­cation because the private sector couldn't handle it. The education market was vibrant and accessible to rich and poor in the days before "public education." Government got itself involved because it was the obvious way to conduct grand social engineering. The American architects of the Prussian-inspired "common school" promised to cre­ate a new and improved society—to eradi­cate crime and sin—by replacing the influence of vicious, slothful parents with that of enlightened state-trained educators. Physical fitness was part of the program, along with a curriculum of social studies that portrays expanding government power as benign and the voluntary sphere as ever threatening.

2

This matter confirms another warning of those (notably Thomas Szasz) who see dan­ger in the union of health and state. "We are facing a crisis in this country and in Arkansas with obesity," State Senator Sue Madison said. "I realize this is seeming like a huge invasion of privacy but there is a con­cern because of the health crisis and to some extent that crisis will be [borne] by the tax­payers in the future."

Everyone who believes that government can pay for medical care without serious consequences for liberty can now take stock. All kinds of restrictions on our freedom and privacy—and all impositions on our chil­dren—can be defended as ways to save the taxpayers money. Fiscal responsibility has been enlisted in the cause of statism and col­lectivism. That was the rationalization for the states' suits against the tobacco industry. It will be used to justify suits against fast-food restaurants and who knows what else?

The moral: there is no innocuous use of aggressive force.

Spam may be okay for breakfast, but few people want it flowing into their computers all day. Must we look to government to save us? No, says Christopher Westley.

Ludwig von Mises, in a 1946 reprint, ana­lyzes the effect of the Great German Inflation on business.

For some strange reason, the people who make life-saving drugs are under assault. Doug Bandow asks us to consider what things would be like without the pharma­ceutical companies.

When one thinks of Austrian economics

one thinks of Ludwig von Mises, the great theorist and an adviser to FEE founder Leonard E. Read. In the second installment of a classic reprint, legendary economic jour­nalist Henry Hazlitt explores the contribu­tions of Mises and later generations of Aus­trian writers.

The term "rent-seeking" is often used in discussions of public policy from a free-market perspective. Sanford Ikeda con­tributes a primer on subject.

The U.S. Supreme Court had handed down landmark decisions on affirmative action at state colleges and universities. George Leef provides a tour of the court's reasoning.

Even though little is known about what causes climate change, an awful lot of people "know" what to do about it. Christopher Lingle advises caution.

A group of critics of laissez faire called themselves "distributists." Concerned with the insecurities in the marketplace, they offered a philosophy with some surface appeal. Thomas Woods goes beneath the surface.

Columns this month: Richard Ebeling looks back at the German hyperinflation. Robert Higgs examines the federal govern­ment's venture into the shipping industry. Donald Boudreaux looks at population fal­lacies. Walter Williams praises the social role of profit. And William Thomas, hearing the argument that Africa's future depends on handouts from wealthy Americans, replies, "It Just Ain't So!"

This month's book reviewers meditate on Adam Smith, the income tax, money, and the war on terrorism.

— S H E L D O N RICHMAN

3

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by Richard M. Ebeling IDEAS

ON LIBERTY NOVEMBER 2 0 0 3

The Great German Inflation

E ighty years ago this month, on Novem­ber 15, 1923, the Great German Infla­tion came to an end when the monetary printing presses were finally shut down.

The German people had gone through nine years of ever-greater monetary expansion, ever-more soaring prices, the financial destruction of much of the society's middle class, a massive misdirection and squander­ing of the country's productive capital in an illusionary economic boom, and the ruin of much of Germany's social fabric. The infla­tionary madness ended in a virtual total col­lapse of the German mark.

The German inflation began—as many other inflations have begun throughout his­tory—through the government's turning to the printing press to finance its war expendi­tures. Almost immediately after the start of World War I, on July 29 , 1914, the German government suspended all gold redemption for the mark. Less than a week later, on August 4, the German Parliament passed a series of laws establishing the government's ability to issue a variety of war bonds that the Reichsbank—the German central bank —would be obliged to finance by printing new money. A new set of Loan Banks was created to fund private-sector borrowing, as well as state and municipal government bor­rowing, with the funds for the loans simply being created by the Reichsbank.

Richard Ebeling (rebeling@fee.org) is the president of FEE. His latest book is Austrian Economics and the Political Economy of Freedom (Elgar).

During the four years of war, from 1914 to 1918, the total quantity of paper money created for government and private-sector spending went from 2.37 billion to 33.11 billion marks. By an index of wholesale prices (with 1913 equal to 100), prices had increased more than 245 percent (prices failed to increase far more due to wartime con­trols). In 1914, 4.21 marks traded for one dollar on the foreign exchange market. By the end of 1918, the mark had fallen to 8.28 to the dollar.

But the worst was to come in the five years following the war. Between 1919 and the end of 1922 the supply of paper money in Germany increased from 50.15 billion to 1,310.69 billion marks. Then in 1923 alone the money supply increased to a total of 518,538,326,350.00 billion marks. By the end of 1922 the wholesale price index had increased to 10,100 (still using 1913 as a base of 100). When the inflation ended in November 1923, this index had increased to 750,000,000,000,000. The foreign-exchange rate of the mark decreased to 191.93 to the dollar at the end of 1919, to 7,589.27 to the dollar in 1922, and then finally on November 15,1923, to 4,200,000,000,000.00 marks for one dollar.

During the last months of the Great Infla­tion, according to Gustav Stolper, "more than 30 paper mills worked at top speed and capacity to deliver notepaper to the Reichs­bank, and 150 printing firms had 2,000 presses running day and night to print the Reichsbank notes."

4

But these statistical figures do not tell the human impact of such a catastrophic col­lapse of a country's monetary system. In his book, Before the Deluge: A Portrait of Berlin in the 1920s (1972), Otto Friedrich writes that "By the middle of 1923, the whole of Germany had become delirious. Whoever had a job got paid every day, usu­ally at noon, and then ran to the nearest store, with a sack full of banknotes, to buy anything that he could get, at any price. In their frenzy, people paid millions and even billions of marks for cuckoo clocks, shoes that didn't fit, anything that could be traded for anything else." The price of a cup of cof­fee would double in the time that a customer took to drink it in a cafe.

Food supplies became both an obsession and a currency. The breakdown of the medium of exchange meant that the rural farmers became increasingly reluctant to sell their agricultural goods for worthless paper money in the cities. Urban dwellers streamed back to the countryside to live with relatives in order to have something to eat. Anything and everything was offered and traded directly for food to stave off the pangs of hunger.

Illusionary Boom The inflation generated a vast and illu­

sionary economic boom. In his classic study, The Economics of Inflation (1931), Con­stantino Bresciani-Turroni detailed how the inflation distorted the structure of prices and wages, generating paper profits that created a false conception of wealth and prosperity. Austrian economist Ludwig von Mises was the first one to emphasize this aspect of the inflationary process. (See Mises's 1946 analysis on page 10.) As the selling price of a manufactured good was pushed far above the cost of production, profits appeared huge. But when the manufacturer went back into the market to begin his production

process again, he found that the costs of resources and labor had also dramatically increased. What had looked like a profit was not enough to replace the capital used up earlier.

The distorted relative-price signals during the inflation resulted in misallocations of capital and labor in various investment pro­jects that were found to be unsustainable and unprofitable when the monetary debauchery finally came to an end. Thus a "stabilization crisis" followed the inflation, as capital and investment projects were left uncompleted because of a lack of available real resources, and workers faced a period of unemployment as they discovered that the jobs the inflation had drawn them into had now disappeared. The consumption of capi­tal and the misuse of resources and labor during the years of inflation left the German people with a far lower real standard of living, which only years of work, savings, and sound new investment could make up for.

Unfortunately, Germany's economic recovery in the middle and late 1920s turned out to be an illusion as well. A game of financial musical chairs was played out, in which Germany borrowed money from the United States to pay off reparations to the victorious Allied powers, as well as to fund a vast array of municipal public-works pro­jects and government-sponsored business investment activities. These all came crash­ing down, too, when the boom of the 1920s turned into the Great Depression of the 1930s. It also set the political stage for Adolf Hitler's rise to power in 1933.

The current confidence that inflation seems to be a nonexistent or minor problem is an illusion also. The same political ideas and institutions that resulted in such mone­tary madness in the past still exist in the world today. Only a change in political-economic ideas can assure that it does not happen again. •

5

IDEAS ON LIBERTY NOVEMBER 2 0 0 3

Massive Foreign Aid Is the Solution to Africa's Ills?

It Just Ain't So!

President Bush traveled to Africa in July. Those sympathetic to the President might say he went to show his charitable con­

cern for the problems of Africa and his sin­cere care for the downtrodden of the world. But a less rose-tinted view might have shown an unprincipled but skillful political machine bolstering its image among centrist "liber­als" and gamely trying to chip away at the Democratic Party's lock on black voters.

Whatever the motivations of the adminis­tration, the trip brought the partisans of American engagement in Africa out into the media spotlight. The president had thrown a bone to the foreign-aid community with his surprising endorsement of a $3 billion-a-year package of AIDS-fighting measures for Africa in his State of the Union address. Far from sated with this forced donation from U.S. taxpayers, the international aid bureau­cracies have finally gotten a taste of red meat, and they want more.

How much more? One of the most notable calls for aid for Africa that emerged from this time was "A Rich Nation, a Poor Continent," an op-ed by economist Jeffrey Sachs in the New York Times. Sachs sketches the truly terrible conditions in which many Africans live: life expectancy "is less than 50 years in most of Africa, and less than 40 years in some of the AIDS-ravaged countries. Until the pandemics of AIDS, tuberculosis, malaria and other killer dis­eases are brought under control in Africa, economic development and political stability will remain crippled."

Having been a counselor on conversion to capitalism to ex-communist governments (most notably Russia), Sachs is now director of a sustainable-development center called "The Earth Institute" at Columbia Univer­sity. He is also an adviser to UN Secretary General Kofi Annan. He has become a lead­ing opponent of the free market and a cheer­leader for foreign aid. His thinking seems to follow this general line: Capitalism and tech­nology are good things, but any real progress in the world calls for international governmental solutions. In the case of epi­demic disease in Africa, Sachs's preferred solution is massive funding for the Geneva-based "Global Fund to Fight AIDS, Tuber­culosis and Malaria," to the tune of up to $8 billion per year from the United States alone.

An aunt of mine who was an unrecon­structed New Dealer used to say to me: "The problem with the poor is that they don't have money." This seems to be Sachs's view of the needy in Africa: the only thing that keeps them sick is a lack of medicine, and they only lack medicine because they are poor. Sachs puts it this way: "If rich coun­tries contributed a total of around $25 bil­lion per year [to fight disease in the Third World], the increased investments in disease prevention and treatment could prevent around eight million deaths each year in poor countries throughout the world."

My aunt was right that the poor lack money. Any poor person could be made richer—at least temporarily—by a handout. And Sachs is right that in African countries where AIDS runs rampant, the sick lack medicines and too many don't practice safe sex. Enough medicine and education could have a real impact, extending lives and encouraging people to act more prudently.

But Sachs is wrong to think that Africa's problems are essentially medical or financial. He is wrong to emphasize charity at the expense of focusing on the real needs of Africa: rational culture, justice, and capital-

6

ism. And he, along with the Bush adminis­tration, is wrong to think that wealthy coun­tries or wealthy people bear a responsibility for the health or welfare of others to whom they are unconnected by any significant ties.

My aunt ignored the fact that lasting poverty has roots in culture and incentives. Handouts don't eliminate poverty; too often they help entrench the habits that perpetuate poverty. For his part, Sachs ignores the fact that Africa's crisis has roots in gangster pol­itics, irrationalism, and collectivism. No African country ranks among the 35 freest in the world, as objectively measured in Eco­nomic Freedom of the World 2002. In fact, several countries in Africa are among those with the least economic freedom and the most capricious legal environment. These include Zimbabwe, Guinea-Bissau, and both Congos. It is no accident that these are some of the poorest and most miserable countries in the world. It is misgovernment—not AIDS or any other disease—that has ruined these countries. When Sachs urges support for the Global Fund, he is calling, in effect, for the support of a new hyper-bureaucracy of foreign-aid experts and for open-ended sup­port of the very regimes that are to blame for Africa's crisis. It precisely to accommodate corrupt and ineffective regimes that the Global Fund is at pains to describe itself as a funding supplement to existing government programs.

A Matter of Morality Ultimately the case here is moral. Sachs

wants the top 400 earners in the United States to give up 10 percent of their income to the Global Fund. He argues "our world is

dangerously out of kilter when a few hun­dred people in the United States command more income than 166 million people in Africa."

The world is out of kilter, but not in the way Sachs means. Americans who have earned great wealth through their productiv­ity are not vultures who prey on the poor. The world's poor are generally poor or sick or hungry for reasons that have nothing do with the businesses that make Americans rich. In fact, having nothing to do with American-style capitalism tends to keep peo­ple poor, and it is corrupt, intrusive govern­ments that keep them out of contact with the free market. (It is no accident that some of the best health care in Africa is that provided by big corporations for their local employ­ees.) What is out of kilter is the political cul­ture of Africa, not the fact that Americans and other mostly free people can acquire or possess great wealth.

There is nothing wrong with people giving some of their money away to help others. But when they do so, be they richer or poorer, they should make sure that they are really helping those in need, and not just throwing good money after bad into the pit of cultural and political corruption. The rich certainly do not owe the world an apology for what they have, and they are not respon­sible for all the terrible problems that people find themselves in. The health situation in Africa is a terrible shame. But the shame is not America's.

—WILLIAM THOMAS (wthomas@objectivistcenter.org)

Senior Fellow for Objectivist Studies The Objectivist Center

Poughkeepsie, New York

7

IDEAS ON LIBERTY

NOVEMBER 2 0 0 3

The Economics of Spam by Christopher Westley

What's the matter with the Internet? I used to love it, at least the part of it that brought e-mail. One of the highlights of my day used to be

Outlook Express's friendly tone announcing that another e-mail had arrived in my inbox. Then I would stop what I was doing to see which friend or colleague was check­ing in, or what requested information had arrived.

Those were my glory days of e-mail. I miss them. Nowadays, it seems that for every ten e-mails I receive, eight are unsolicited sales pitches, also known as spam. And of those eight, half offer samples of crude and dehumanizing porn. As a result, I never check my e-mail when my children are nearby.

Though I once wrote in praise of e-mail, I now consider it a mixed bag. A couple of my friends have forsworn it entirely, having decided that the costs outweigh the benefits, and it is hard not to agree that they have a point. There have always been the good and the bad aspects of e-mail, but it seems that lately, based on my own inbox and my ever­growing list of filtered terms, the bad aspects seem to be trumping the good.

My experience reflects the national trend. According to the Wall Street Journal, the amount of spam as a proportion of all e-mail on the Internet increased by 350 percent between the summer of 2001 and the sum-

Christopher Westley (cawestley@msn.com) teaches economics at Jacksonville State University.

mer of 2002. It is now approaching 50 per­cent of all e-mail traffic. Spam makes up 70 to 80 percent of all incoming e-mail to America Online's servers and 40 percent to Earthlink's network.

The economics of spam explain its perva­siveness. Once a spamming system is set up, the marginal cost of sending an unsolicited e-mail is virtually zero. As a result, the small­est of response rates can make the process profitable. The rule of thumb is that while old-fashioned junk mail sent via the post office requires a response rate of 1 in 100 to be profitable, spam mail requires a response rate of 1 in 100,000. This greatly increases its appeal as a marketing tool.

For instance, a recent story in the Fort Worth Star-Telegram reported on an Inter­net marketer who mailed ten million e-mails a day offering eavesdropping software for $40. His annoying efforts result in 50 orders a day, allowing him to earn $700,000 a year. Not bad for a response rate of only 0.000005 percent. Following the law of sup­ply, his success only signals other spammers to enter the industry, which is an extremely easy process. Anyone with a computer and an e-mail account can enter.

The result is a reduction in the appeal of an otherwise remarkable medium. After all, how many people would watch TV if the networks only showed commercials? The disgust is growing, and the politicians are listening, as evidenced by a recent "Spam Forum" conducted by the Federal Trade

8

Commission and several bills working their way through both houses of Congress. This is a bad combination of events.

It is bad because solutions to problems such as these are ineffective, cannot be legis­lated, and will result in enriching offshore enterprises. In the aftermath of 9/11, the government has made clear its desire to reg­ulate many forms of communication, partic­ularly e-mail. The spam explosion provides a useful foil to justify such regulation on the basis that spam is simply another variant of market failure requiring state oversight.

Besides being incompatible with a free society, these responses are also incompati­ble with market theory that teaches us that the world in which we live is dynamic, not static, and that it takes time for resources to respond to problems that may hinder soci­ety. The market does not fail when the price of gasoline spikes, causing us to reallocate our gasoline usage until entrepreneurs respond to the change in price by redirecting resources to gasoline production. Indeed, it is the government that fails when it inter­venes in this process, frequently causing the problems to persist needlessly.

For the same reason, we needn't assume that the current spam scourge must neces­sarily be the norm, thus overruling whatever advantages we otherwise might have from e-mail and justifying government intervention. In fact, there is no way anyone can know how the nature of e-mail will change over the next five years. But the assumption that today's bad conditions will persist indefi­nitely certainly does not square with practi­cal experience in most every sphere of life. Although the modern state depends on such assumptions, they go beyond naivete to enter the realm of the nonsensical.

Problems Create Solutions Indeed, the problems themselves create the

necessary conditions for entrepreneurs to offer various solutions. One can envision the problems resulting in the creation of private intranets, in which spammers pay for the

right to solicit their wares. In fact, their pay­ment could result in zero-price e-mail and web access for the non-marketers who use the system, thus funding it much like broad­cast television networks. The provider of such intranets could regulate who spams and how much. Such a solution is technologically feasible now, although not yet practical. But if the costs continue to increase, market con­ditions could easily change to allow such a system to come about.

There are also many unique and clever ways that markets are responding to spam problems today. One company, SpamArrest (http://spamarrest.com), intercepts all e-mail that is sent to its subscribers, requiring senders to visit a web page and click a box allowing the e-mail to be sent to its final des­tination. The genius of this process is that it requires senders to follow through on their e-mails by doing something only humans can do. Such efforts would place a serious crimp in the work of the e-mail marketer men­tioned above.

Other companies offer free services such as SpamGourmet's (www.spamgourmet. com). They allow subscribers to submit faux e-mail addresses to companies that are likely to try to sell them to e-mail marketers. The users specify how many e-mails they wish to receive in response, after which they are "eaten." Since the firms never see users' real e-mail addresses, they never make it on e-mail marketing lists.

There are a myriad of other approaches too numerous to list here. The fact that no one will use e-mail if current trends con­tinue is enough to guarantee that some solu­tions will be found. Just as markets provide sufficient regulation to maximize transac­tions, so will they provide tools necessary for e-mail services to maximize satisfied customers. As long as the state does not intervene in this corrective process, the glory days of e-mail will return. It will be as safe, effective, and beneficial as it was in years past.

Now excuse me while I clear out my inbox. •

9

IDEAS ON LIBERTY NOVEMBER 2 0 0 3

Business Under German Inflation by Ludwig von Mises

P aper money inflation and credit expan­sion never fall upon a people like an act of God. They are always the outcome of a deliberate policy. The governments

and the parties in power take recourse to inflation because they consider it as a bless­ing or at least a minor evil when compared with the effects either of cutting down pub­lic expenditure or of choosing other methods of financing. This applies to both peace and to war. Inflation as such does not contribute anything to winning battles. It does not pro­duce arms and other equipment. It is merely one of the methods available for financing the huge expenditure caused by war. The other methods are taxation and borrowing from the public (and not from the commer­cial banks). If a government prefers inflation, it must not plead as an excuse that there was no other way left.

Of course, the term inflation has fallen into disrepute. All governments and all polit­ical parties emphatically announce that their main concern is to fight this dreadful thing called inflation. In fact they are not fighting inflation, but only its symptoms and neces­sary consequences, namely the rise in prices. And this struggle is doomed to failure pre­cisely because it is merely a tampering with

Ludwig von Mises (1881-1973) was the foremost Austrian economist of the twentieth century, an adviser to FEE, and the author of Human Action. This is the major part of an article originally pub­lished in the Commercial and Financial Chronicle, March 7, 1946.

symptoms. Nothing is done to end the root cause, i.e., the increase in the quantity of money and the expansion of credit.

The truth is that the propensity to inflate is nowadays greater than it ever was before. It is only that the advocates of inflation and credit expansion have resorted to new termi­nology. They call the thing expansionism, an easy money policy, unbalanced budgets, or functional finance. The British paper which inaugurated in 1943 the action which resulted in 1944 in the Bretton Woods agree­ment explicitly declares that the aim of the new international institution is to bring about "an expansionist pressure on world trade." It expects that this expansionist pol­icy will perform "the miracle . . . of turning a stone into bread."

The idea that monetary and credit expan­sion make business good, create "full employment," and bring general prosperity was the essence of the ideas of Mercantilism. The fallacies implied were utterly exploded by the economists whom the Prussian His­torical School and their modern followers, Keynesians and the American advocates of unbalanced budgets, disparage as orthodox. A new systematic analysis and thorough refutation of the defects of the doctrine of expansionism certainly is not needed. Those interested in such a critical examination are referred to the writings of Professor B. M. Anderson, of the late Professor Edwin Kem-merer,!1! and of many other brilliant Ameri­can economists. The goal of this article is

10

m mmm M A R K ften I f lNer Mantua ZoAun® genomimn.

A 20,000,000 mark (August 1923)

merely to stress an aspect of the problems involved which is often neglected. It seems expedient to exemplify the issue with the case of the German inflation of 1914-1923 , the classical expansionist experience of our century.

A Mark Is Always a Mark Among the gravediggers of the German

people's prosperity and the German cur­rency, Friedrich Bendixen occupies an emi­nent place. He was a bank manager and the author of many books and articles dealing with monetary matters. His prestige and his influence on the course of the Reich's finan­cial policy were enormous.

When in the first World War the mark's purchasing power declined and concomi­tantly foreign exchange rates went up, Ben­dixen trumpeted that this was a rather fortu­nate event. For, he said, it made it possible for the Germans to sell their holdings of for­eign securities at a profit.

Let us consider an example. A German owned on the eve of the war a Dutch secu­rity which was traded on the bourse of Ams­

terdam at 100 guilders, at that time by and large the equivalent of 240 marks. The price of the stock dropped and the German sold it at 90 guilders. This involved in gold a loss of 10 percent. But in the meantime the price of the guilder in Berlin had risen from 2.40 to 3 marks; 90 guilders represented now 270 marks. The German capitalist made in marks an apparent gain of 30 marks or 12.5 percent. However, the average Germans and their spokesman Bendixen were not shrewd enough to see things in the right light. With them a mark was still a mark. They smilingly pocketed an alleged gain.

The same phenomenon presented itself in every branch of international economic rela­tions. The champions of expansionism assign to rising foreign exchange rates the power of stimulating export trade. It was this idea that impelled many European coun­tries in the inter-war period to devalue their domestic currencies.

Such a devaluation at one stroke makes foreign exchange rates rise. But domestic commodity prices and wage-rates lag for some time behind the rise in foreign exchange rates. In the interval, before the

11

Ideas on Liberty • November 2003

price structure on the domestic market becomes adjusted to the new state of mone­tary conditions, some export projects, which were unprofitable before, appear seemingly profitable. The exporter makes an apparent profit—in domestic currency—although he may sell at a lower price in foreign currency. But what really goes on is that he gives the domestic products away at a price which enables him only to buy a smaller quantity of foreign products. It is true, the nation whose currency has been devalued exports more during this interval, but it gets in exchange only less or, at least, not more than previously for a smaller quantity exported.

This is what the economists have in mind when speaking of "apparent" gains. These gains are the result of false reckoning and self-deception.

The Huge Inflationary Profits of Business

It is asserted again and again that German business flourished in the years of the great inflation. In fact, the annual reports of the big German corporations and the big Ger­man banks showed fat profits, and high div­idends went to the stockholders. (The Ger­man banks were not merely banks, but at the same time holding companies owning a con­trolling part of the common stock of many manufacturing corporations.)

However, these gains were often apparent only, a mere product of the fact that the businessman's economic calculation employed the mark as a common denominator. When translated into a less fluctuating foreign cur­rency, for instance, into dollars, they revealed themselves frequently as losses.

It did not matter for German business whether prices in gold and in dollars were ris­ing or falling. Prices in marks were rising whatever the movement of prices on the world market was. The sale of the products and inventories netted big paper profits because prices in marks were soaring ceaselessly.

A second source of paper profits was pro­vided by insufficient writing off of deprecia­tion. The goal of laying aside a portion of the annual earnings in a depreciation fund is

to provide the means for the replacement of industrial equipment worn out in the process of production. Failure to provide such funds adequately makes the profits appear larger than they really are. If such apparent surplus profits are dealt with as if they were real profits, the result is capital consumption. As German business was slow in discarding the old custom of writing off annually a fixed percentage of the original costs of equip­ment, it virtually reduced the amount of cap­ital invested.

With the rapid progress of inflation more and more businessmen began to comprehend that their methods were suicidal. They started what was called "the flight into real values" (Flucht in die Sachwerte). They began to reinvest the apparent profits in their plants. It did not matter for them whether these investments were reasonable or not. Their only concern was to get away from the mark at any cost. Later events have evidenced that a great part of the invest­ments made in the years of the inflation by the German banks and the independent busi­ness concerns were malinvestments. German business emerged from the trial of the infla­tion period financially weakened. The big German banks were already in 1924 on the verge of insolvency.

Of course, the Germans, steeped in the monetary fallacies of Bendixen and Knapp,l2J were not aware of this fact. Neither were the foreign bankers and investors shrewd enough to judge correctly the plight of the German big banks and of many of the big German business concerns. In the twenties foreign loans to the Reich, the member states, the municipalities and to the banks and big business amounted to about 20 billion Reichsmarks. Besides, foreigners invested $5 billions directly in German busi­ness. This huge inflow—against which repa­ration payments of about $10.8 billions had to be held—disguised for a few years the frailty of the big banks. When the depression ended foreign lending to Germany, the col­lapse of the banks could no longer be delayed. It occurred in 1931 as the payoff both of inflation and of ignorance of funda­mental economic issues.

12

Business Under German Inflation

The belief that a sound monetary system can once again be attained w i thou t making substantial changes in economic policy is a serious error. W h a t is needed first and foremost is to renounce all inflationist fallacies. This renunciation cannot last, however, if it is not firmly g rounded on a full and complete divorce of ideology from all imperialist, militarist, protectionist, statist, and socialist ideas.

— L U D W I G V O N M I S E S

"Stabilization of the Monetary Unit—From the Viewpoint of Theory" (1923), reprinted in On the Manipulation of Money and Credit

One of the reasons why public opinion misconstrued the economic consequences of the German inflation was the emergence of a class of inflation profiteers.

The profiteers were those speculators who were quicker to realize the true meaning of the inflationary boom than were the man­agers of the banks. The interest rates charged by the banks, although high when compared with normal conditions, were ridiculously low when compared with the stock exchange profits a speculator could earn on a market at which prices skyrock­eted on account of the inflation. No matter what stock he bought, the speculator netted a gross profit which exceeded by far the interest he had to pay to the lending bank. As long as the inflation went on there was no risk for him in embarking upon bull transac­tions with borrowed money.

Germany Financially Wrecked by the Inflation

The inflation favored the debtors at the expense of the creditors. It made a very small group of smart speculators rich. It impover­ished the immense majority of the nation.

The losses of the losers by far surpassed the total amount of the gains of the profi­teers. The per capita wealth of the Germans was reduced, in spite of the fact that they had succeeded in unloading a part of their losses on the shoulders of foreign capitalists, especially American and Swiss.

The excess of inflation losses over inflation gains stemmed from three different sources:

The nation consumed more than it pro­

duced: it lived on its capital. The greater part of the apparent profits was eaten up either by the speculators and businessmen themselves or by the Government which col­lected under the misleading label of income and corporate taxes funds which were in fact taken away from the capital invested. The wastefulness of municipal administra­tion was so outrageous that even Schachtl3! could not help criticizing it. Many labor unions succeeded in raising nominal wage rates above the rise in commodity prices. They booked the resulting rise in real wage rates as "social gains." In fact, these work­ers shared in the capital consumption. They thus contributed to a later fall in the pro­ductivity of labor and thereby of market wage rates.

Germany dumped cheap exports on the world market. It happened again and again that German manufactures, produced out of imported raw material, were exported at prices which—when calculated in dollars— did not even cover the price of the raw mate­rials contained. Yet, the German exporter was convinced that he had made a good deal.

A great many of the investments made during the critical years were malinvest-ments. . . . •

1. See Benjamin M. Anderson, Economics and the Public Welfare: A Financial and Economic History of the United States, 1914-1946 (Princeton: D. Van Nostrand Company, Inc., 1949) and Edwin W. Kemmerer, The ABC of Inflation (New York: McGraw-Hill, 1942) .

2. Georg Friedrich Knapp, author of The State Theory of Money (1924 [1905]) .

3. Hjalmar Horace Greeley Schacht, German financier who held a number of positions in German government, 1 9 2 3 - 1 9 4 3 , including president of the Reichsbank and minister of economy.

13

IDEAS ON LIBERTY

NOVEMBER 2 0 0 3

Healers Under Siege by Doug Bandow

The Food and Drug Administration has approved a drug to combat non-Hodgkin's lymphoma. That's good news for cancer patients in America

and around the world. But you wouldn't know it, given the vicious political campaign being directed against the pharmaceutical industry.

America's drug makers are under attack. Congressmen would like to cut prices, and the expansion of Medicare will encourage Uncle Sam to regulate drug access and prices directly.

State legislators are debating their own draconian price-control schemes. The media, such as the PBS show "Frontline," have tar­geted the drug makers. Trial attorneys, left-wing activists, and state attorneys general are filing lawsuits charging pharmaceutical firms with everything from racketeering to fraud.

This assault is not new. Drug companies have been under pressure for a decade. When the Clinton administration attempted to nationalize American health care, it sought to demonize the drug makers, as well as most doctors and hospitals.

Unfortunately, years of demagoguery advanced for political profit are having an impact. Public opinion of the industry has been falling sharply.

Contributing Editor Doug Bandow is a syndicated columnist and the author and editor of several books. He is co-editor of Wealth, Poverty and Human Destiny (ISI, 2003).

While the American people have yet to agree with Al Gore's grotesque comparison of the drug makers to the tobacco companies and "big polluters"—there is little that he would not say to win a vote—they are increasingly turning on an industry that has done so much to improve their lives. Harris Interactive reports that those who believe the drug makers are doing a good job of serving consumers fell from 79 percent to 57 percent from just 1997 to 2001 .

Yet new pharmaceuticals are responsible for almost half the reduced mortality from different diseases between 1970 and 1991. Columbia University's Frank Lichtenberg figures that every new drug approved during that time saves over 11,000 life-years annu­ally. And the benefits continue. He estimates that fully 40 percent of the increase in aver­age life span between 1986 and 2000 is due to new drugs.

"Three decades ago medical technology was rather primitive by today's standards," says Dr. E. M. Kolassa of the University of Mississippi School of Pharmacy. "Today, physicians have at their disposal medications and technologies that provide for the imme­diate diagnosis and treatment of most of the disorders that affect modern man."

Hundreds of new drugs are in develop­ment for cancer, heart disease, strokes, Alzheimer's, infectious diseases, and AIDS. Consider the last: Two decades ago there was no treatment for AIDS. By 1987 there was one drug, AZT. Now there are 74 anti-

14

The real cost of pharmaceuticals is not making the pill that patients swallow. It's the research that goes into developing the pill—as well as the other 9,999 substances that never made it to market. The pill's price also has to cover the cost of running the company and complying with burdensome FDA requirements.

AIDS drugs available and another 100 in development.

Similarly, pharmaceuticals offer the best hope of combating any future outbreak of SARS, which has killed over 700 people. In fact, the quickest solution is to find an exist­ing medicine that works. Laboratories are currently screening some 2,000 approved and experimental drugs to see if they are use­ful in fighting SARS. Gurinder Shahi, a doc­tor in Singapore, explains: "Given how little we know about SARS and the reality that it is killing people, it is justified for us to be daring and innovative in coming up with solutions."

Daring innovation is most likely to come in a competitive, profit-driven market. After all, today's medicines exist only because there is a bevy of sophisticated pharmaceuti­cal companies devoted to finding drugs to heal the sick.

Isn't this serving consumers well? Ah, but prices are high. Too high, in the

view of myopic, vote-seeking politicians. "There's no question that prescription drugs cost too much in this nation," claims Sena­tor Jim Jeffords of Vermont.

Why, yes. They only save lives. Extend our life spans. Moderate our pain. Control our nausea. Eliminate our need for surgery. Treat our allergies.

Why should we have to pay for such prod­ucts? The outrage. The horror. Drugs should be free. Or at least a lot cheaper.

If Life Were Different It would be nice if they were, of course,

but people who believe prices can be low­ered legislatively are living in the world as it

ought to be. Everyone ought to be rich and beautiful. Everyone ought to be paid a mil­lion dollars a year for working ten hours a week. Everyone ought to have a Mercedes at a Yugo price. Everyone ought to have a mansion for the price of a shack. And every­one ought to have all of the pharmaceuticals now available, but for less money.

Unfortunately, pharmaceuticals do not appear outside company doors every morn­ing as manna from heaven appeared in the Promised Land for the ancient Israelites. Instead, firms review numerous plausible substances: of every 5 ,000 to 10 ,000 checked, 250 make it to animal testing. About five reach human trials.

Only one gets past the Food and Drug Administration (FDA) onto the market. That one has to pay for the research costs of the other 5,000 to 10,000. It isn't easy.

Thus the real cost of pharmaceuticals is not making the pill that patients swallow. It's the research that goes into developing the pill—as well as the other 9,999 sub­stances that never made it to market. The pill's price also has to cover the cost of run­ning the company and complying with bur­densome FDA requirements.

The Tufts Center for the Study of Drug Development estimates that companies spend nearly $900 million over a ten- or 15-year period to develop each drug. America's major research firms alone spent $32 billion on R & D last year.

Nevertheless, some politicians would con­trol prices directly. For instance, legislators in Maine want to impose prices they think are fair, and are threatening retaliation if any company tries to pull out of the market in response. Washington State already demands

15

Ideas on Liberty • November 2003

(The country is not full of profit-minded tort attorneys.) Imposing Canadian (or Mexican, or Afghan) prices in the United States would mean the drugs would not be developed in the first place.

Politicians also are pushing a range of use restrictions—formularies, reference pricing, and more. Yet every attempt to stop people from using new medicines endangers their health and threatens to increase health costs elsewhere. For instance, Frank Lichtenberg estimates that replacing 1,000 older pre­scriptions with newer drugs raises pharma­ceutical costs by $18,000, but cuts hospital costs by $44,000.

Everyone in America has a stake in lower­ing health-care costs. But they also have a stake in maintaining quality health care. If the pharmaceutical industry succumbs to the demagogic campaign against it, we will all suffer the painful consequences. •

Checking your holiday gift list? Give a year of Ideas on Libertyl

It's a thoughtful way to remember that special teacher, student, business associate, or friend. Just $ 3 9 per year.

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16

superdiscounts for some of its programs. But government can only confiscate the

drug makers' existing inventory. It can't force them to keep making drugs to be con­fiscated in the future.

Adopting Canadian- or European-style controls will result in a Canadian- or European-style drug industry and patient access. These countries do their best to free ride on America, but their pharmaceutical industries are weak and getting weaker.

Moreover, their ill citizens have far less access to important medicines. A group called Europe Economics points out that patients often wait years for life-saving products.

Still, America's political air is filled with other alleged panaceas, such as reimporta­tion of drugs from Canada. Yet prices are lower there because the government imposes price controls and litigation costs are less.

Thoughts on Freedom by Donald J. Boudreaux

IDEAS ON LIBERTY

NOVEMBER 2 0 0 3

Oblivious to the Obvious "Ironically, the birth of a child is registered as a reduction in national income per head, while the birth of a farm animal

shows up as an improvement." — P E T E R B A U E R ( 1 9 9 1 )

E ach passing year makes me more and more aware of human beings' astound­ing capacity for overlooking the obvi­ous. I have in mind here not those parts

of reality that can be understood only with specialized training—say, professional econ­omists' knowledge that the elasticity of a demand curve isn't its slope. Nor do I have in mind aspects of reality that can be known only through experience—say, the reality that French chardonnays taste very different from California chardonnays, or that the Boston Red Sox are destined never again to win a World Series.

Instead, I refer here to aspects of reality that are vivid, overwhelming, and plainly in everyone's sight. Nevertheless, many people remain oblivious to this reality.

My chief example is the continuing, widely held belief that population is the enemy of material prosperity. Newspapers, magazines, and water-cooler conversational­ists routinely pronounce, as if it were as pal­pable as gravity, that a large and growing population of human beings implies wide­spread poverty and misery. Foundations—

Donald Boudreaux (dboudrea@gmu.edu) is chair­man of the economics department of George Mason University and former president of FEE.

including the world's richest, the Bill and Melinda Gates Foundation—devote billions of dollars to the cause of population "con­trol."

Population Connection (formerly Zero Population Growth), a chief proponent of policies to limit population growth, announces on its website: "We want people everywhere to join our cause so that, together, we can make the world better, safer, and less-crowded." U.S. Representa­tive Carolyn Maloney of New York says that slowing population growth is required if we are to "stop hunger and preserve our world's resources."

But no evidence exists to support a belief in the dangers of large or growing popula­tions. Indeed, all the evidence, most of which is plainly in view of everyone, is that more people mean more prosperity for everyone.

Probably the richest 23 contiguous square miles on the planet is Manhattan. It is also a speck of earth that is among the world's most densely populated, with each square mile, on average, packed with 67,000 resi­dents. More than 1.54 million people live on Manhattan and some 2.12 million people work there—all amidst the millions of visi­tors who flock to that island every year.

According to conventional belief, Man-

1 7

Ideas on Liberty • November 2003

hattanites should be among the earth's most destitute and wretched peoples. Yet despite the fact that Manhattan has no forests, farms, pastures, fisheries, or mines, per-capita income there is a sky-high $73,000.

Compare Manhattan to the 46,907 square miles that are Mississippi, a state boasting a great deal of fertile farm land, bountiful lakes and rivers, and thick forests. Missis­sippi is also blessed (if conventional belief is valid) with a human-population density less than 1/1000th that of Manhattan (61 Mis-sissippians per square mile compared to 67 ,000 Manhattanites per square mile). According to conventional belief, Mississip-pians should be much wealthier than Man­hattanites. But instead they're much poorer. Per-capita income in Mississippi is less than $16,000, a mere 22 percent of that of Man­hattan.

Also according to this same conventional belief, Russia should be among the wealthi­est countries on earth. It has vast forests, rich mineral deposits, plentiful inland and coastal waters, and great expanses of arable land—and its population density is only a third that of Mississippi: 22 people per square mile. But per-capita income in Russia is a meager $7,700.

Manhattan is far richer than Mississippi and Mississippi is far richer than Russia.

Here are two additional examples. Each square mile of Hong Kong holds, on aver­age, 15,966 residents; per-capita income there is among the world's highest at $24 ,506 . In stark contrast, Ethiopia is sparsely populated, with each square mile holding, on average, 157 people. Ethiopia's per-capita income is among the world's low­est at $600.

Does Wealth Cause Poverty? Don't think that the wealth of the devel­

oped world comes at the expense of the less-developed world. Empirical study upon empirical study shows that the poorest parts of the world are those without substantial contacts with advanced commercial soci­eties. The greater a people's contact with

commercial society, the wealthier they become.

A high density of human population clearly does not cause poverty; a low density of human population clearly does not make people prosperous. Manifest evidence of these facts surrounds us. And yet the pre­vailing belief of many people—including top officials in governments, at the United Nations, in academia, and in foundations—is that higher population densities entail lower material welfare for the average person.

Why? This is not, after all, a case in which the evidence is ambiguous, complex, or sparse.

One reason for the continuing oblivious­ness to the obvious fact that prosperity is not threatened by dense human population is the stubborn failure to recognize the crucial insight that the ultimate resource is the human mind.

Wealth is not automatically produced by nature and then "distributed" for consump­tion to passive peoples. Wealth—all wealth; every bit of it—requires for its creation active and rational human involvement. Without creative human minds and effort, no wealth would exist. Even the most fertile land would yield no crops; rivers and oceans would yield no fish; forests would yield nei­ther lumber nor game animals. No minerals, no chemicals, no cloth, no shelter, no paper, no steel, no medicines, no wine, no M-Life— nothing—would exist without human creativity, effort, and peaceful interaction.

It follows that more creative human beings mean more, not less, prosperity. And as all the great economists from Adam Smith through F. A. Hayek, Peter Bauer, Julian Simon, and Vernon Smith repeatedly remind us, humans are remarkably creative and pro­ductive only when, and always when, they are free to bargain and exchange with each other.

So places such as New York City and Hong Kong are wealthy because they are densely populated with free people. Places such as Ethiopia and Russia are poor because they have so few free human minds. No fact is more sure and more obvious. •

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IDEAS ON LIBERTY

NOVEMBER 2 0 0 3

Understanding "Austrian" Economics, Part 2 by Henry Hazlitt

A fter the passing of its three founders—Carl Menger, Friedrich von Wieser, and Eugen von Bohm-Bawerk—Austrian economics fell for

a long time into eclipse. It was not so much refuted as neglected. English-speaking econ­omists began devoting themselves to such matters as mathematical treatment of prob­lems of "general equilibrium." The Austrian view was revived mainly by one man, an Austrian by birth as well as an "Austrian" by conviction—Ludwig von Mises ( 1 8 8 1 -1973). He made his influence felt both by his written works and by his oral teachings. Among his early distinguished students and followers were Gottfried Haberler, Fritz Machlup, Oskar Morgenstern, Lionel (sub­sequently Lord) Robbins, and, most influen­tial of all, F. A. Hayek.

Ludwig von Mises was prolific, but his principal contributions were made in three masterpieces. These were The Theory of Money and Credit, first published in German in 1912, Socialism: An Economic and Socio­logical Analysis, also first published in Ger­man in 1922, and Human Action, which grew out of a first German version appearing

Henry Hazlitt (1894-1993) was a prominent eco­nomic journalist, author of many books, including Economics in One Lesson, a founding trustee of FEE, and a frequent contributor to The Freeman: Ideas on Liberty. This article appeared in the February 1981 issue. It was originally commis­sioned by the Silver and Gold Report, Newtown, Connecticut.

in 1940, but was not published in Mises's own rewritten English version until 1949.

Mises on Human Action Though there is now a gratifying number

of able young American economists writing in the Austrian tradition, Human Action still stands as the most complete, powerful, and unified presentation of Austrian economics in any single volume. Mises always gener­ously acknowledged his indebtedness to his predecessors. He recalled in a short autobi­ography (Notes and Recollections, 1978) that around Christmas 1903 he read Menger's Principles of Economics for the first time. "It was the reading of this book," he wrote, "that made an 'economist' of me."

It would carry me to too great length to itemize and explain all the contributions to economics that Mises made, and I will con­tent myself with mentioning only two. He was the first to prove that it was impossible for socialism to undertake "economic calcu­lation"; and he made one of the most impor­tant contributions of any economist toward solving the problem of "the trade cycle."

Because Mises so uncompromisingly rejected government interventionism in all its forms, he acquired the reputation of a "laissez-faire extremist" during most of his lifetime, and was scandalously neglected by the majority of academic economists. But because Hayek elaborated his own ideas in a more conciliatory form, his writings

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Ideas on Liberty • November 2003

attracted more attention from the academic world, and he leapt into prominence in 1931 with his own contribution to the theory of the trade cycle, Prices and Production, along lines similar to Mises's. The result is entitled to be called the "Mises-Hayek" theory.

Hayek is also a prolific writer, but though he has written volumes on money, on the trade cycle, on inflation, and on The Pure Theory of Capital (1941), he has never attempted a comprehensive book on eco­nomic principles. Of late years he has turned his attention mainly to the realms of politics, ethics, and law, and has written profound and widely discussed treatises on The Con­stitution of Liberty (1960) and a three-volume work on Law, Legislation and Lib­erty, completed in 1979. He has been more widely influential in his own lifetime than was Mises, and was awarded the Nobel Prize in Economics in 1974.

Today's zealous group of younger "Aus­trian" economists, though all acknowledg­ing their great debt to Mises, do not treat his Human Action as the final word on the sub­ject, but are exploring a whole range of eco­nomic problems with a new vigor. Murray Rothbard [1926-1995] , a student of Mises, produced a two-volume treatise, Man, Econ­omy, and State (1962), along Misesian lines, with notable clarity of exposition, and mak­ing important contributions of his own, pointing out the fallacies, for example, in the prevailing theories of "monopoly price."

Israel M. Kirzner (b. 1930), professor of economics at New York University, another former Mises student, although he has not undertaken a comprehensive book of "prin­ciples," has explored individual problems in five separate volumes: The Economic Point of View (1960), Market Theory and the Price System (1963), An Essay on Capital (1966), Competition and Entrepreneur ship (1973), and Perception, Opportunity, and Profit (1979). His work is distinguished by great scholarship, systematic thoroughness, and precision of statement. He has brought further illumination to every problem he has dealt with.

Finally, no reference to individual writers would be adequate that did not include Pro­

fessor Ludwig M. Lachmann [ 1 9 0 6 - 1 9 9 0 ] . Though he is one of the most original and profound among living A u s t r i a n e c o n o m i s t s , his work has not yet nearly achieved the Ludwig Lachmann (1906-1990)

recognition it merits. Among his principal books are Capi­tal and Its Structure (1956; republished in 1978), The Legacy of Max Weber (1971) and Capital, Expectations, and the Market Process (1977). His writings are notable for their emphasis on the role of expectations and for their thoroughgoing application of a "radical subjectivism."

Restrictions of space permit me merely to list the names of half a dozen of the now-increasing group of important "Austrian" economists: S. C. Littlechild, Gerald P. O'Driscoll, J r . , Mario J . Rizzo, Hans Sennholz, Sudha R. Shenoy, and Lawrence H. White. But so arbitrarily short a list must omit a number of names unjustly.

The "Austrian" economists, more consis­tently than those of any other school, have criticized nearly all forms of government intervention in the market—especially infla­tion, price controls, and schemes for redistri­bution of wealth or incomes—because they recognize that these always lead to erosions of incentives, to distortions of production, to shortages, to demoralization, and to similar consequences deplored even by the origina­tors of the schemes. But personal value judg­ments of government policy are of course not an essential part of Austrian theory.

The present vigorous Austrian School is not content merely to keep re-expounding the principles developed by Menger and Mises, but is addressing itself constantly to new problems, or a more thorough probing of old ones. This is dramatically evident in a recent volume, New Directions in Austrian Economics (1978), edited by Louis M.

20

Spadaro, with contributions from eleven writers. Professor Spadaro himself, in his concluding essay, outlines some of the still unresolved problems that Austrians ought to explore. In some sense, however, practically all eleven contributions do the same thing.

I have heard it said (by an economist of another school) that there is no such thing as Austrian economics; there is only good eco­nomics or bad. But in the same way we could say that there is no such thing as Ricardian economics, Marxist economics, Keynesian economics, and so on. This sort of statement, though true in one sense, is false in another. It is fallacious in implying that if anything is classified in accordance with one characteris­tic, it cannot be classified in accordance with any other. It is like saying that there are no such persons as Americans or Japanese; there are only men and women. Those who call themselves "Austrian" economists give them­selves this label because of its historic origins; but they happen also to believe that its fun­damental theses are true, and offer more promise than any other for further progress in economic science.

Perhaps something should be said about the chief differences today between Austrian economics and what we may call "ortho­dox" or "mainstream" economics. The diffi­culty here is that "mainstream" economics itself would be hard to define. Economists are still divided into a number of recogniz­able "schools"—neoclassicists, Keynesians, the Chicago school, the Lausanne school, and so on. The limits of space forbid me to go into the distinguishing doctrines of each of these schools. But one outstanding differ­ence of the Austrians from all of these lies in their method of reasoning. The Austrians emphasize methodological individualism. That is, they not only begin by emphasizing human actions, preferences, and decisions, but individual actions, preferences, and ini­tiatives. Mainstream economists are con­cerned with "macroeconomics," with aver­ages and aggregates; and those of the Lausanne school, trying to reduce economics to an "exact" science, and therefore seeking to quantify everything, are obsessed with complicated mathematical equations that

Understanding "Austrian" Economics, Part 2

try to stipulate the conditions of "general equilibrium."

Equilibrium a Useful Concept, Though Never a Reality

Now "general equilibrium" is defined by these economists (when it ever is) in highly abstract and obscure phrases; but for laymen it might be defined as a condition in which all the tens of thousands or millions of com­modities and services are being turned out in the exact quantities and proportions in which they are relatively wanted by produc­ers or consumers, so that there are no "shortages" or "surpluses." All prices reflect costs, and there is no more profit in making one commodity than any other. (In fact, there is no "pure" profit at all.) These econ­omists admit that at any moment this condi­tion does not exist, but they contend that there is a constant long-run tendency toward equilibrium, because when there is an unusual profit in turning out some one prod­uct, producers will turn out more of it, and when there is a loss in turning out some other product, producers will make less of it, or transfer to making something else.

Now the concept of equilibrium (or much better, the Mises concept of an "evenly rotating economy") can have great useful­ness as a tool of thought. We are often bet­ter able to analyze the problems of change if we begin with the fictitious assumption of a state of affairs in which certain changes are hypothetically eliminated. But this is a purely imaginary construction, a useful fiction. It should never be confused with reality.

While a true "equilibrium" between the marginal cost of production and the market price of any one commodity is a condition that is seldom reached, even momentarily, a "general equilibrium" in the relative produc­tion, supply price, and demand price of all commodities and services is a condition that is never reached, even for an instant of time.

The concept itself is extremely nebulous. Neoclassical economists seem obsessed today with setting up complicated algebraic

21

Ideas on Liberty • November 2003

equations stipulating the conditions of equi­librium or functional relations under "per­fect competition" and the like, but it is diffi­cult to specify precisely what their x's and y's stand for. They cannot refer to physical quantities, because you cannot add apples to horses, or a ton of gold watches to a ton of sand. One might add or compare quantities times prices, but what would be the meaning of the total, or any of the parts that make it up? The price, even of one commodity, dif­fers from hour to hour, place to place, and transaction to transaction. The value of the currency itself fluctuates and constantly changes its exchange ratio with commodi­ties. If we simply add or compare "values," then we must recognize that values are purely subjective. They are impossible to measure or to total because they differ with each individual.

If we pass over these fundamental difficul­ties, where do we arrive? Even if we assume that there may be a persistent long-run ten­dency toward general equilibrium, we must admit that there is also a persistent short-run and long-run tendency toward the persis­tence of disequilibrium.

This is not only because there is a ten­dency of entrepreneurs, in increasing or reducing production in response to market and profit signals, to overshoot the mark, but because individual entrepreneurs, so far from making merely automatic responses, are constantly gaining new knowledge, alert to new opportunities, changing methods and reducing production costs, improving prod­ucts, innovating—turning out entirely new products or inventions. And consumers too are constantly learning, changing tastes, and demanding new products to meet new wants. So Austrian economists seldom speak of market equilibrium, but of the market process.

My own suspicion is that the enormous attention now being devoted to stipulating the mathematical conditions of "general equilibrium" is a pursuit of a will-o'-the-wisp, of questionable help in solving any real economic problem.

But space forbids me to go into too many detailed contrasts. Let me sum up briefly the

main Austrian theses once again, this time not in my own words or in Menger's, but in those of two prominent living [1981] "Austri­ans."

"Beginning in the 1870's in Vienna, Aus­tria," writes Pro- Israel Kirzner fessor Kirzner, "the school was distinguished by its empha­sis on the subjective elements in economic analysis, on the significance of time in pro­duction processes, and on the role of error and uncertainty in economic phenomena" (his italics).

The summarization by Professor Lach-mann is remarkably similar: "The first, and most prominent, feature in Austrian eco­nomics is a radical subjectivism, today no longer confined to human preferences but extended to expectations. . . . Secondly, Aus­trian economics displays an acute awareness of the many facets of time that are involved in the complex network of interindividual relations. . . . In the subjective revolution of the 1870's the first step in the direction of subjectivism was taken when it was realized that value, so far from being inherent in goods, constitutes a relationship between an appraising mind and the object of its appraisal" (New Directions in Austrian Economics, pp. 1-3).

All the rest of Austrian economics follows from these basic insights. Let me conclude with my own opinion that any economic analysis that fails to embody such insights cannot be entirely sound.

Recommended Reading Those who have no previous acquain­

tance with Austrian economics, and would like a short and simple text written along Austrian lines, might begin with Essentials of Economics by Faustino Ballve (126 pages;

22

Understanding "Austrian" Economics, Part 2

I rv ing ton -on -Hudson, N.Y.: Foundation for Economic Edu­cation). A more advanced . . . i n t r o d u c t i o n (1979), specifi­cally explaining the Austrian point of view, is The Fallacy of the Mixed

Murray Rothbard (1926-1995) Economy, by Stephen C. Lit-

tlechild [out of print]. Surprisingly, the original Principles of

Economics, first published in 1871 by Carl Menger, the founder of Austrian economics (328 pages), still makes an excellent, very readable, and not too technical introduction to the school's basic principles.

Of course, the authoritative and most complete work on modern Austrian theory is

Human Action, by Ludwig von Mises (907 pages, first published in 1949 [fourth edi­tion, FEE, 1996]). Some may find this diffi­cult reading. A very clear two-volume work written thirteen years after Human Action by a student of Mises is Murray N. Roth-bard's Man, Economy, and State [Ludwig von Mises Institute, 987 pages].

For the reader interested in the latest developments in Austrian economics I can highly recommend two books: One is The Foundations of Modern Austrian Econom­ics, edited by Edwin G. Dolan, which con­tains contributions by half a dozen writers [1976, 238 pages, out of print]. The other is New Directions in Austrian Economics, edited by Louis M. Spadaro (1978), 239 pages, with contributions by eleven writers [out of print].

Most of these foregoing books have already been mentioned in the text. The reader may also profitably consult others mentioned there, especially the volumes by Kirzner and Lachmann. •

AUSTRIAN ECONOMICS: A BRIEF BIBLIOGRAPHY Peter J . Boettke, ed., The Elgar Companion to Austrian Economics (Brookfield, Vt.: Edward Elgar, 1 9 9 4 )

Ra imondo Cubeddu, The Philosophy of the Austrian School (London/New Y o r k : Routledge, 1 9 9 3 )

Richard M . Ebeling, ed., Austrian Economics: A Reader (Hillsdale, Mich.: Hillsdale College Press, 1 9 9 1 )

Richard M . Ebeling, ed., Human Action: A 50-Year Tribute (Hillsdale, Mich.: Hillsdale College Press, 2 0 0 0 )

Richard M . Ebeling, Austrian Economics and the Political Economy of Freedom (Northampton , Mass.: Edward Elgar, 2 0 0 3 )

Roger W . Garrison, Time and Money. The Macroeconomics of Capital Structure (London/New Y o r k : Routledge, 2 0 0 1 )

Bettina Bien Greaves, ed., Austrian Economics: An Anthology (Irvington-on-Hudson, N . Y . : Foundation for Economic Education, 1996)

Randall G. Ho lcombe , ed., 15 Great Austrian Economists (Auburn, Ala.: Ludwig von Mises Institute, 1 9 9 9 )

Israel M . Kirzner, ed., Classics in Austrian Economics: A Sampling in the History of a Tradi­tion, 3 Vols. (London: Will iam Pickering, 1 9 9 4 )

Israel M . Kirzner, Ludwig von Mises (Wilmington, Del.: ISI Books, 2 0 0 1 )

Alexander H. Shand, Free Market Morality: The Political Economy of the Austrian School (Lon­don/New Y o r k : Routledge, 1 9 9 0 )

Karen I. Vaughn, Austrian Economics in America: The Migration of a Tradition (New Y o r k : Cambridge University Press, 1 9 9 4 )

23

IDEAS ON LIBERTY NOVEMBER 2 0 0 3

Rent-Seeking: A Primer by San ford Ikeda

R eaders of Ideas on Liberty often come across references to the term "rent-seeking." Usually from the context it's plain that it refers to something unde­

sirable, but what exactly is it? The idea of rent is an old one in econom­

ics. In mainstream economics it refers to a payment to the owner of a fixed factor of production over and above its "opportunity cost," that is, what it could fetch in its next most profitable use. In the case of land, for example, any payment to the owner of a par­ticular parcel beyond the cost of, say, clear­ing and leveling it or for its "permanent and indestructible qualities" was traditionally considered rent.1

There are those, including nineteenth-century social critic Henry George, who believe that such payments are wasteful because (1) they could have been spent to bring other goods into existence, such as houses or food, instead of being used merely to transfer ownership of an already existing commodity from one person to another, and (2) they do nothing to increase the supply of the fixed factor. Does this mean that the pur­suit of rent is a bad thing because it's waste­ful? No, not in this case.

Let's examine the first argument. A pure rental payment for a fixed factor such as land, whether it's paid in increments over

Sanford Ikeda (sanford.ikeda@purchase.edu) is an associate professor of economics at Purchase College, 5UNY.

time or all at once in a lump sum, doesn't merely move a product around from one person to another. (In fact, land doesn't even do that because it isn't movable, except near places like the San Andreas fault, where occasionally it is.) But what rent does help to do is encourage the transfer of land owner­ship from a less-profitable use to a more-profitable use—from, say, a housing devel­opment to agriculture, if growing crops will fetch a higher profit than building houses on the land. In this way, the transfer, and thus the rental payment, is part of a process that increases wealth.

Here it's important to realize that produc­tion in economics has nothing necessarily to do with the physical transformation or movement of things, but rather with the cre­ation of value, which is subjective in nature. For instance, if John and Mary, without either one using force or fraud, trade owner­ship of an apple and an orange, both neces­sarily expect to feel subjectively better off as a result (or else at least one of them would­n't agree to the trade) because each will be giving up something he or she values less for something he or she values more. The net gain in subjective value that each one feels constitutes newly created wealth. In devel­oped societies this is how most wealth is produced, by free trade.

Likewise, the consumers of food generate for the landowner a greater excess of rev­enue over cost than do potential consumers of the houses that could have been built on

24

the land. Rent is a fixed payment to the owner for using the land in a more valuable way, in terms of willingness to pay.

How does anyone know which use is most valuable in this sense? No one can know for certain, but the entrepreneur-owner of the land has a strong incentive to decide cor­rectly who should have the ultimate use of it, consumers of food or of housing, because he stands to earn a profit for making the right choice and suffer a loss for the wrong choice. Resources that entrepreneurs spend in seek­ing rent, insofar as they improve their chances of making wealth-increasing deci­sions, are not wasteful.

The second argument against rent is that rents don't increase the supply of land. However, economists think dynamically (or at least they should), and that means taking into account what happens over time as the unknowable future becomes the partially known present. From this perspective it's possible to view the rent that a particular tract earns for its owner as something that could very well induce other profit-seeking entrepreneurs to invest in the clearing or fill­ing in of more land when working space becomes scarce enough. That is, rent can serve as an incentive to produce more space in which further valuable work can take place.

So, from the point of view either of effi­ciently allocating existing working space or of creating new working space, rent aids in the creation of wealth.

Rent-Seeking Defined Where then does the bad connotation of

rent-seeking come from? Gordon Tullock, one of the pioneers in

the theory of rent-seeking, has defined it as "the use of resources for the purpose of obtaining rents for people where the rents themselves come from some activity that has some negative social value." 2

We've seen how rents generated in the free market have a positive "social value," insofar as we can agree that creating wealth is a good thing.3 Thus no negative connotation would attach to free-market rent-seeking, that is,

spending resources to acquire land rent or any other privately acquired rent. Tullock is referring to those activities that destroy wealth. Nevertheless, people sometimes feel uncomfortable with the free market because they're unable to differentiate profit-seeking from (bad) rent-seeking.

According to the principle of human action that Ludwig von Mises used as the starting point of economics, man acts in order to improve his situation as he sees it. One of the important lessons taught by Mises, and later many of the adherents of the Public Choice school of political econ­omy, who follow in the footsteps of Tullock and James Buchanan, is that while the prin­ciple of human action is universal, the par­ticular actions chosen, and the consequences that follow from them, depend crucially on the "rules of the game."

If the rules say that the acceptable way to improve your situation is to provide a prod­uct or service that consumers would be will­ing to pay more for than the opportunity cost of the resources used, then that's what you'll tend to do. In that case, if you're cor­rect, and if you can out-compete your rivals in the market for those consumers' dollars, then your actions will have added wealth to society. This is profit-seeking.

On the other hand, if the rules say that it's okay to use political means—the govern­ment's authority to initiate violent aggres­sion and fraud—to contrive rents by pre­venting others from competing with you or by forcibly taking the wealth of others, peo­ple will naturally tend to spend valuable resources trying to gain access to them. This is rent-seeking.

But unlike profit-seeking, rent-seeking doesn't create wealth, it merely transfers it from one party to another. Whoever wins rents by using political means may be better off, but others, potential competitors, but more importantly consumers, will be made decidedly worse off. The latter will pay higher prices, get poorer quality, or have fewer choices because political means are quite effective in discouraging rival entrepre­neurs. The results of rent-seeking also stifle the competitive discovery process, so that

25

Ideas on Liberty • November 2003

consumers are less likely to become aware of more efficient methods or better providers.4

Thus the resources that competitive rent-seekers spend in their quest for these politi­cally created rents are indeed wasted because they are used to produce an outcome in which nothing of value is created. Indeed, rent-seeking of this kind destroys wealth.

Rent-Seeking Versus the Rule of Law So far we've seen that rent-seeking is

undesirable because it's wasteful. In addi­tion, however, because it usually takes the form of restrictions on competition or on the use of property rights, the desire to gain rents through political power distorts the operation of the market process. Such dis­tortions, especially as they impinge on inter­est rates and the prices of goods and services, make it harder for consumers and producers to plan for the uncertain future, increasing their chances of error.

But an even more serious problem at the level of social norms is that rent-seeking tends over time to encourage growing num­bers of ordinary people to engage in it, trying to acquire political power either to gain advantages over the less powerful or as redress against the mounting advantages and political power of others. It thereby sets into motion a troubling dynamic that over time progressively erodes respect for the rule of law, limited government, and private property.

The rule of law binds the government by rules that are fixed and announced before­hand, and are not intended to benefit or harm any particular persons or groups. For example, a rule that forbids anyone from engaging in fraudulent advertising is in accord with the rule of law, whereas a rule granting a monopoly privilege to a particular

firm or union is not. Like private property, the rule of law serves to protect individuals against arbitrary government interventions, and as such it's one of the pillars of personal liberty, limited government, and the free market.

Rules of the game that beget rent-seeking are clear violations of the rule of law because they arbitrarily privilege some at the expense of others. This in turn gives people an incen­tive to spend resources either to associate themselves with the winners or distance themselves from the losers. The desire to capture politically generated rents is a fun­damental motive for interventionist breaches of the rule of law. At the same time, rent-seeking tends to prevail to the extent that cit­izens permit government to violate the rule of law. A politico-economic system that strictly observes the rule of law would per­force ban rent-seeking.

The difference between profit-seeking and rent-seeking is akin to that between peaceful trade and armed robbery. Both require time, energy, and skill, but one creates wealth while the other destroys it; one encourages peaceful cooperation, the other undermines it. •

1. Ludwig von Mises and Murray Rothbard defined rent dif­ferently, as simply the payment for the services of any durable commodity. Since this primer is concerned with explaining the meaning not of rent itself but of rent-seeking, which is based on mainstream-economics concepts, it would not be appropriate to address these differences here. On this see Ludwig von Mises, Human Action, 4th rev. ed. (Irvington-on-Hudson, N.Y.: Foun­dation for Economic Education, 1996 [1949]) , pp. 6 3 5 - 3 7 , and Murray N. Rothbard, Man, Economy, and State (Los Angeles: Nash, 1970 [1962]) , p. 2 4 9 .

2. Gordon Tullock, Gordon Brady, and Arthur Seldon, Gov­ernment Failure (Washington, D.C.: Cato Institute, 2 0 0 2 ) , p. 4 3 .

3. Tullock uses the term "social" value, but he is simply referring to the new wealth that each individual experiences, viewed as a whole. If economists try to suggest anything more than this by the term, they're probably making a big mistake.

4. Any attempt to compete with those protected by such privilege is a challenge to the power of the state. As a matter of fact, because political rent-seekers rely on the government's authority to initiate aggression and fraud their gains essentially come from robbery at gunpoint.

26

Peripatetics by Sheldon Richman

IDEAS ON LIBERTY

NOVEMBER 2 0 0 3

Canute's Courtiers Were Wrong I

Shortly after the northeast blackout a New York Times headline blared: "Under Deregulation, Montana Power Price Soars." The story explained that

"Montana residents used to pay some of the lowest rates for power in the Northwest, but now, some lawmakers lament, they pay among the region's highest. What happened? Mainly deregulation."

The story went on: "Montana Power executives argued six years ago that state residents would benefit from paying compet­itive rates for electricity and natural gas. As market rates have gone up, though, the resi­dents have had to bear the cost, critics of deregulation say."

Although the article acknowledged that "So far Montana has not experienced the kind of supply problems that plagued Cali­fornia in recent years," the strong impres­sion was left that rising prices are a grave indictment of deregulation.

The historic blackout again demonstrated that the word "deregulation" is subject to as many interpretations as a Rorschach inkblot. California is said to have embraced deregulation, but this is true only if the word means something other than the removal of regulation. In Montana, legislation was passed in 1997 to allow a choice of retail electricity providers. Retail prices were frozen for two years, and electricity co-ops, which serve half the state's homes, were allowed to opt out of the new arrangement.

Sheldon Richman (srichman@fee.org) is editor of Ideas on Liberty.

All but two did so. When the price freeze expired, prices rose, which has upset cus­tomers. An organization of single mothers even sued the state in federal court, claiming the legislation is unconstitutional because, the Missoulian reported, it "caused or will cause huge power rate increases that deprive the women of the basic necessities of life." (A district court judge dismissed the suit.)

Rather than dwell here on the misleading use of the word "deregulation," let us focus on the proposition that rising retail prices per se indicate that that something is amiss. This belief rests on a usually unspoken, but nevertheless consequential premise that prices ultimately are arbitrary and can be controlled by government with impunity.

This in turn is part of a deeper fallacy: the proposition that economic laws do not exist and that the belief that they do is a supersti­tion limiting man's collective power to arrange his social life. It's an old misconcep­tion, a throwback to pre-economics. As Ludwig von Mises wrote in Epistemological Problems of Economics,

When men realized that the phenomena of the market conform to laws, they began to develop catallactics and the the­ory of exchange, which constitutes the heart of economics. . . . The development of economics . . . did more to transform human thinking than any other scientific theory before or since. Up to that time it had been believed that no bounds other than those drawn by the laws of nature circumscribed the path of acting man.

27

Ideas on Liberty • November 2003

It was not known that there is still some­thing more that sets a limit to political power beyond which it cannot go. Now it was learned that in the social realm too there is something operative which power and force are unable to alter and to which they must adjust themselves if they hope to achieve success, in precisely the same way as they must take into account the laws of nature. [Emphasis added.]1

Thus economics—the identification of the regularities that constitute the market process—stood in the way of the sheer will of the ruler. He could command, but if he contravened the laws of economics he could not bring about the results he wished. "Thus," Israel Kirzner wrote, "the idea that there exist in society 'laws' which operate regardless of the will of the rulers was a gen­uinely revolutionary idea." 2 And, Mises added, "Whoever wished to combat liberal economic policy was compelled to challenge the character of economics as a science. Ene­mies arose against it for political reasons." 3

"A Prodigiously Ingenious Mechanism"

The German Historical School of the late nineteenth century was one of those oppo­nents of liberalism that rejected economics. It held that only specific historical episodes could be described, and that no universal laws regarding human action existed. Carl Menger, founder of the Austrian school, defended economics against the historicists. Mises did the most to systematize the "sci­ence of human action" (which he called "praxeology") and to free it from its earlier tentative empirical mooring. But one can find hints of the Misesian approach in the writings of Frederic Bastiat and others. Bas­tiat saw spontaneous regularity all around. "We should be shutting our eyes to the facts if we refused to recognize that society cannot present such complicated combinations in which civil and criminal law play so little

part without being subject to a prodigiously ingenious mechanism. This mechanism is the object of study of political economy." 4

What does this theorizing mean? It means that regardless of motives, if the government puts a ceiling on prices, there will be unsat­isfied demand—shortages (other things being equal). If the government puts a floor under prices, there will be unsold goods— surpluses (again, other things equal). If a minimum wage is legislated, there will be surplus labor—unemployment. It's the law.

The story of the control of electricity prices is classic. For the last few decades, the demand for electricity has been rising. Think about how many new uses people have for electricity: computers, modems, VCRs, DVD players, cordless telephones, video-games, and more. But while this demand was rising, regulators often thwarted the industry's abil­ity to meet that demand with greater supply. Meanwhile, retail prices were strictly con­trolled by the authorities.

Prices are signals. They communicate vital information about the state of resources, goods, and services. Changes in those signals indicate changes in prevailing conditions— and stimulate remedial action: conservation by consumers and new supplies and alterna­tive products from entrepreneurs. The idea that anything good can come from distorting or squelching those signals is astounding in its lack of wisdom. It's equivalent to believ­ing that a person with a fever can be helped by placing his thermometer in ice water. Yet that is the policy that has often been fol­lowed with electricity (and so many other things).

The would-be regulators may not want to hear it, but King Canute the Great's courtiers were wrong. He couldn't really "command the tides of the sea to go back." •

1. Ludwig von Mises, Epistemological Problems of Eco­nomics (New York: New York University Press, 1976 [ I960] ) , p. 3.

2. Israel M. Kirzner, Ludwig von Mises (Wilmington, Del.: ISI Books, 2001) , p. 72.

3. Mises, p. 4 . 4. Frederic Bastiat, Economic Harmonies (Irvington-on-

Hudson, N.Y.: Foundation for Economic Education, 1996 [1870]) , p. 5.

28

IDEAS ON LIBERTY

NOVEMBER 2 0 0 3

Grutter v. Bollinger A Constitutional Embarrassment by George C. Leef

" A ^ animals are created equal—but M\ some are more equal than others."

mjk So goes the crucial line in George • M Orwell's classic Animal Farm. The

Supreme Court's recent decision in Grutter v. Bollinger makes one think of that line, since it gives constitutional approval to the policies used at many colleges and universi­ties that group applicants by race and treat certain groups as "more equal than others." Racial preferences can't be used too overtly, the Court said, but they are acceptable, and if one takes the rhetoric of the decision seri­ously, it would seem that the nation would be in a terrible state if colleges and universi­ties didn't use them.

Grutter has been wildly cheered by most of the higher education community and social interventionists generally. By "social interventionists," I refer to those who believe that virtually every aspect of society can be improved by the application of their wis­dom, whether it's the housing market, health care, preparation for retirement, or anything else. Social interventionists are never content to leave processes alone if they can take over and direct them. When it comes to universi­ties, student admissions can't just be left up

George Leef is director of the Pope Center for Higher Education Policy and book review editor of Ideas on Liberty.

to a simple rule like "admit the academically best students possible." Instead, social inter­ventionists delight in trying to engineer a student body that is "diverse" and have con­vinced themselves that doing so is both noble and immensely beneficial.

The Problem of Government Education

I would not care in the least if any private college or university wanted to use racial preferences to assemble a student body that it regarded as having the ideal mix of peo­ple. They should be free to discriminate on the basis of race—or religion, musical tastes, family background, political views, acceptance of vegetarianism, or anything else—if they want to. The trouble occurs when government-funded institutions adopt such preferences. We can blissfully ignore the choices of private institutions that can neither tax nor control us. When dealing with government, however, people cannot escape its power and are entitled to expect that they will not be treated differently from others, or compelled to support institutions that do.

This is one of the vast number of contro­versies that would never arise if government did not undertake activities that go outside

29

Ideas on Liberty • November 2003

its proper sphere of protecting individual rights. Governments do not need to run col­leges and universities. Voluntary action is quite capable of providing us with all the various educational opportunities we might desire. If the market for education were allowed to function and the government exited the field, the heated political disputes over admissions, textbooks, curriculum, and so on, would cease. The discrimination-in-admissions battle is just one more reason why the entire government education empire should be privatized.

As long as we have government-run uni­versities, however, we should hold them to the law. The Fourteenth Amendment forbids the states from denying any citizen the equal protection of the laws. Enacted just after the Civil War in an attempt to head off a regime of official discrimination against former slaves and free blacks, the Fourteenth Amendment has come to mean generally that government may not treat some citizens better or worse than others based on irrele­vant characteristics, such as ancestry. When a government college or university adopts a policy that establishes different admission criteria for applicants depending on what their race is (or is claimed to be—people learn to game the system by saying that their lineage to a distant ancestor puts them in a favored group), it is certainly not treating all people as legal equals.

"Diversity Is Educationally Beneficial" So how did the Supreme Court evade the

equal-protection clause to arrive at the con­clusion that racial discrimination in univer­sity admissions is permissible, provided that it's done in an "individualized" manner? (In the companion case, Gratz v. Bollinger, the Court held that the University of Michigan's undergraduate admissions policy was imper­missible because it automatically gave black, Hispanic, and American Indian applicants 20 points toward the 150 needed. That was too much favoritism. So the meaning of the two cases is that racial preferences are all right, but don't be so blatant as to use a point system.)

Justice Sandra O'Connor's opinion wheeled out one of the most frightful con­cepts in constitutional jurisprudence—com­pelling state interest. When government wants to do something that the Constitution forbids, it argues that there is a "compelling state interest" that the Court should recog­nize, and that it's permissible for govern­ment to violate the Constitution because of that interest. Sometimes the Court "inter­prets" the Constitution to get around unwanted limitations on the power of gov­ernment, and sometimes it finds that a "compelling state interest" overrides them. The result is the same. Our rights and liber­ties erode.

In this case, the compelling state interest is the "education benefits" that are supposed to come from having a "diverse" student body. That conclusion, backed up by noth­ing more than some dubious research and the testimony of university officials who want to be able to discriminate, is the linch­pin of the Court's opinion.

The last time the Supreme Court dealt with the issue of racial preferences in admis­sions was the Bakke case in 1978. There, a badly divided Court wound up holding that states could not use racial quotas, but that race might be considered as a "plus factor" in individual instances. A line in Justice Lewis Powell's opinion that preference advo­cates were quick to seize on was that univer­sities might have an educational interest in having a racially diverse student body. That soon became the new justification for racial preferences. They weren't being used to rem­edy past discrimination (as the older "affir­mative action" argument went), but were being used to obtain the benefits of diversity.

But was there anything to Justice Powell's speculation? To make the "diversity is edu­cationally beneficial" argument work when it was sued by several white applicants who had been rejected despite having significantly stronger academic records than the minority students who were accepted, the University of Michigan needed some evidence. It had one of its faculty members, Professor Patri­cia Gurin, conjure up a study that arrived at the desired conclusion. There were signifi-

30

Grut te r v. Boll inger: A Constitutional Embarrassment

cant educational benefits to having a "diverse" student body, she proclaimed.

Most people would assume, on hearing that conclusion, that the study irrefutably demonstrated that students learn their chem­istry, calculus, history, and so on better when the student body is "diverse." Whether that would be a "compelling state interest" is debatable, but the purported benefits were not of that sort. Rather, they were extrapo­lated from student surveys probing their atti­tudes on such things as their level of intellec­tual confidence, whether they have friends of different ethnicities, and whether they're "good listeners." That's all this decision rests on, a very rickety support for a consti­tutional holding.

The Gurin study has been subjected to withering scrutiny. For example, Professors Thomas Woods and Malcolm Sherman con­clude in a paper written for the National Association of Scholars that "there is no evi­dence that campus racial diversity has any educationally significant effect, direct or indirect, on any of the academic and civic outcome variables that the University of Michigan has discussed." Moreover, there is evidence pointing the other way that is at least as persuasive—that the fixation on racial quotas in education leads to divisive-ness, polarization, and deviation from the university's educational mission.

Nevertheless, Justice O'Connor accepted Michigan's feeble argument whole. Then she magnified those dubious "educational bene­fits" molehills into a Himalaya Range of social improvement, saying that universities need to be able to racially engineer their stu­dent bodies so we can have "cross-racial understanding" and to "cultivate a set of leaders with legitimacy in the eyes of the citizenry."

This is a non sequitur of breathtaking pro­portions. Are we really to believe that so much hangs on the ability of universities to reject some white and Asian students with stronger academic profiles in order to get

*Thomas E. Woods and Malcolm J . Sherman, "Is Campus Racial Diversity Correlated with Educational Benefits?" National Association of Scholars, April 4, 2001. The executive summary, with a link to the full report, is online at www.nas.org/reports/ umich_diversity/um ich_execsum.htm.

more students from racially preferred back­grounds? If schools couldn't or didn't practice such discrimination, would "cross-racial understanding" become unattainable? Would it be impossible to find "leaders with legitimacy"?

How Much "Diversity" Do We Need? If the reason for believing that educational

benefits follow from student-body diversity is weak, the reason for believing that those benefits depend on reaching some particular number of minority students is nonexistent. Suppose that Michigan admitted students solely on the basis of academics. There would still be some racial diversity—and plenty of diversity of other kinds. Students would still interact with a diverse faculty and live in a diverse world. To defend its desire to reach a certain level of "minority representation," the university used what amounted to a quota system. But why not just accept whatever degree of racial diver­sity would come from admitting the most qualified students?

The university answered there had to be a "critical mass" of minority students so that they wouldn't feel "isolated." For that proposition no evidence exists. Do we know that, for example, black students won't speak up in class unless it contains a certain number of other black students? No. The very idea is both insulting and risible. We aren't talking about first-graders here. We're talking about young adults, and there is no reason whatsoever to assume that young adults from these groups have much to add to the educational environment, but won't add it unless they have several other students "like themselves" in the classroom.

Alas, the absurd "critical mass" argument found favor with a majority of the justices. It is hard to believe that this flimsy justification for discriminatory admission policies is any­thing other than a constitutional fig leaf, a fiction designed to hide the fact that the Court has decided that preferential policies are a good thing and universities should be allowed to use them, no matter what the Constitution says.

31

Ideas on Liberty • November 2003

What is really at the core of the enthusi­asm among social interventionists for racial preferences in higher education (and else­where) is, I believe, a peculiar feature of their way of looking at the world. That feature is what we may call groupthink, the tendency to evaluate phenomena not from the stand­point of individuals, but of groups. Group-thinkers don't much worry about whether laws and procedures treat individuals fairly. Instead, they worry whenever they see that a group which they perceive as having some­how suffered in the past is not advancing as rapidly as they think it should. Whenever that's the case, groupthinkers don their social interventionist robes and try to make things better.

Because the average incomes of blacks, Hispanics, and American Indians are below the national average, groupthinkers believe that these groups have to be helped. Enabling more of such students to get into top colleges and professional schools, they assume, must be a benefit to the group, so it's a good policy to follow. Never mind that most students who benefit from racial pref­erences come from fairly affluent families, and never mind that the correlation between having attended a prestige school and suc­cess in later life is quite weak. As long as minority-group representation is up at places like the University of Michigan, groupthink-ing interventionists are happy.

Former Harvard president Derek Bok has said that it just wouldn't do "to have an all-white university." (Chinese, Japanese, Kore­ans, Indians, and others may be surprised to learn that, for admissions purposes, they're "white.") That statement perfectly symbol­izes the groupthink outlook. Bok frets over the group mixture of the student body, apparently believing that the rest of America does, too.

But does the composition of the student body at Harvard or Michigan or anywhere else matter to people who aren't obsessed with group identity? I think not. I strongly doubt that a Mexican landscape worker ever thinks, "American is all right because Har­vard has a quota for students with Spanish-sounding surnames" or that a black auto

worker ever thinks, "It's a really good thing that Michigan's law school maintains a crit­ical mass of black students." Most of us are interested in ourselves individually, not as group members. If top colleges chose their students just on academic ability, hardly anyone would pay the slightest attention— except, of course, groupthinkers.

Interventionists are good at convincing themselves that their meddling is terribly important. Despite mountains of evidence that programs such as rent control, Social Security, and "public education" are harm­ful, one almost never hears them say, "That was a bad idea; we should have just left well enough alone." In this case, interventionists are just certain that their well-intentioned racial blending on campus is essential for a host of wonderful outcomes. But their protestations that the use of racial prefer­ences is necessary are no more convincing than are interventionist statements on the need to allow them to do other things their way—the "need" for a national health-care system, for example. They habitually exag­gerate the benefits of their policies and ignore the costs.

Sir Henry S. Maine observed in his book Ancient Law that "the movement of the progressive societies has hitherto been a movement from status to contract." That is, progress required the abandonment of social organization in which a person's rights depended on his class, and adoption of the idea that everyone should be equally free to negotiate for whatever he wants in life. Maine was right. By giving its blessing to government use of racial preferences in edu­cation, the Supreme Court has taken a step backward, a reversion toward the time when the law said, "Tell me who you are, and then I'll let you know how you will be treated." That's bad enough, but we also have to worry that Grutter will spawn more govern­ment action in the future, based on the assessment that the Court may call any fool­ish interventionist notion a "compelling state interest" if backed up by some dubious "research" and fervent wishful thinking.

All in all, a bad day's work at the Supreme Court. •

32

IDEAS ON LIBERTY NOVEMBER 2 0 0 3

Global Warming: Extreme Weather or Extreme Prejudice? by Christopher Lingle

Extreme weather is making headlines. Record summer temperatures in Europe and a large number of heat-related deaths in India joined news about severe

flooding in Bangladesh, China, and Sri Lanka. And an unusual number of tornados in the United States have been reported.

For its part the UN World Meteorological Organization (WMO) suggests that global warming is linked to these events. It also declared that extremes in weather and cli­mate are setting new records and the number of such extreme events has been rising. (The Bush administration plans to spend $103 million to study global climate change.)

But these reports raise many questions. As the director of the WMO admitted, the results reflect the fact that monitoring and communication of weather conditions are better than ever before. It turns out that the only certainty is that reporting of extremes is more common, even if the extremes are not.

As it is, little attention is paid to the fact that some of the vulnerability to extreme weather arises from changing human popu­lation patterns. Over the years, foreign aid and emergency disaster relief encouraged the

Christopher Lingle (CLingle@ufm.edu.gt) is profes­sor of economics at Universidad Francisco Marro-guin in Guatemala and global strategist for eConoLytics.com.

building of slums or suburban housing in flood plains. Similarly, air conditioning allows more people to live comfortably in areas subject to hurricanes and cyclones.

In its report, the WMO notes that global averages for land and sea surface tempera­tures in May are the second highest since records began in 1880. However, tempera­tures in the upper atmosphere were not reported. This is no slight oversight. For global warming to be truly global, atmos­pheric temperatures would also have to be rising. But there is no evidence that air tem­peratures have risen to match the reports of rising ground temperatures.

Consider the fact that surface tempera­tures have been increasingly recorded in urban areas or airports that have much more concrete and asphalt than they had even a few decades back. All other things constant, it would be surprising if temperatures taken in such "hot spots" did not increase.

Such alternative explanations tend to be ignored. And so it has become an article of faith that burning fossil fuels increases greenhouse gases (GHG) that lock in heat and cause global warming.

Contrary to conventional wisdom, scien­tific understanding of climate change remains quite unsettled. In particular, it is not clear that observed global warming

33

Ideas on Liberty • November 2003

trends are significant or relevant to the long-term survival of life on earth. Nor is it clear that attempts to reduce greenhouse gases will offset other factors that influence cli­mate. Indeed, there is a strong correlation between sunspot activity and temperature variations.

In all events, GHGs are not the only pos­sible source of warming trends and not nec­essarily the most important. Weather and climate patterns depend on influences from oceans and other water systems, the vari­ability of solar radiation, volcanic aerosols, and greenhouse gas emissions, as well as clouds and water vapor, just to name a few.

The UN Intergovernmental Panel on Cli­mate Change (IPCC) considers at least 12 conditions that could change climate. Of these, only greenhouse gases have come under the close scrutiny of the scientific com­munity. Uncertainty over the influence of the other conditions means that they could worsen the warming trend or reduce it or cancel it out completely.

A report released by the United Nations identified a two-mile-thick "Asian Brown Cloud" that is blamed partly on greenhouse gases. However, an examination of the effects of this enormous blanket of haze found that it counteracts global warming by shading land areas that it covers. So, it turns out that sometimes GHGs can induce cooling.

This is not the only beneficial property of GHGs. It is also overlooked that C O 2 , one of the most infamous carbon-based GHGs, is actually plant food that is converted into oxygen.

Certain Harm, Uncertain Benefits Meanwhile, most economic analyses indi­

cate that mandating reductions in green­house gases will cause significant harm of

which we can be certain, in exchange for uncertain benefits. Our incomplete under­standing of the climate system raises ques­tions over the effectiveness of local or regional responses to perceptions about global climate change.

Since global climate history reveals wide fluctuations over the earth's life, it is impor­tant to choose an appropriate time frame for reference to allow for reasonable compar­isons. Most climate models used by the IPCC cover the last 1,000 years of climate variation. However, most of the data are estimates because surface temperature data have been recorded for only about 150 years. And weather balloon readings have been collected for 30 years, while satellite readings span less than 20 years.

It turns out that greenhouse politics suf­fers from a tendency to exaggerate. Environ­mental activists use worst-case scenarios that reflect their own biases to raise funds to sup­port their causes. Politicians have a vested interest in citizens' believing in catastrophic scenarios that make it easier to levy new taxes, since guilt or uncertain risks make them more willing to surrender more of their income.

While the perceptions of the general pub­lic are influenced by these biases, rising incomes also lead to increased demand for higher environmental quality. Politicians and bureaucrats have tended to respond by imposing stricter environmental regulations, with violations receiving ever wider media coverage. In turn, there has been a misper-ception that environmental quality is wors­ening when it may actually be improving or perhaps remaining unchanged.

Even if global temperatures are rising, we do not really understand why. Neither do we know if nor how soon the worst-case scenarios might occur. Even their ultimate consequences remain uncertain. •

34

Our Economic Past by Robert Higgs

IDEAS ON LIBERTY

NOVEMBER 2 0 0 3

How the Federal Government Got into the Ocean-Shipping Business

Someone who maintains that the rela­tions between government and business in the United States during the past cen­tury have been essentially fascistic could

find no better example than ocean shipping. Here we observe all the requisite elements of economic fascism: government-authorized and -supervised cartels, the semblance of pri­vate property rights without the substance, and the ever-present rationale of preparation for or actual engagement in warfare.

Because many ships historically have been capable of serving both commercial and naval or military purposes, the government always has had an interest in the ocean-shipping business—between 1848 and 1858, for example, the federal government paid three shipping lines more than $11 million in subsidies1—but the government's actions in relation to the building and operation of merchant vessels remained ad hoc and tran­sitory prior to World War I. After enactment of the Shipping Act of 1916, however, the government became deeply and permanently involved.

The onset of war in 1914 created an immediate severe shortage of ocean-shipping services, which only grew worse with the passage of time and the sinking, diversion, or internment of ships. Shipping rates increased enormously. Treasury Secretary William Gibbs McAdoo, a leading Progres­sive with no fear of government interven-

Robert Higgs (rhiggs@independent.org) is senior fellow at the Independent Institute (www. independent.org), editor of The Independent Review, and author of Crisis and Leviathan.

tion, proposed as early as August 1914 that to alleviate the crisis the U.S. government should be authorized to regulate shipping rates and to operate competing vessels on its own account. President Woodrow Wilson strongly supported this plan, writing in Sep­tember 1914, "The idea in the proposal is not that the government should permanently embark in these things, but that it should do the immediate and necessary thing"—a clas­sic example of diving into quicksand.2

The Wilson administration's proposal met substantial opposition in Congress—Senator Elihu Root declared it to be "a measure of state socialism which, if established, will inevitably destroy individual liberty"—and both Wilson and McAdoo devoted much time and effort to gaining its approval.3 Pro­ponents urged that the government's mer­chant ships would serve also as naval auxil­iaries and thus contribute to national security. In promoting the proposal McAdoo began to emphasize the national-security aspect, having learned from experience, he later wrote, that "people as a rule are far more interested in fighting, and in prepara­tions for fighting, than they are in any con­structive commercial or industrial effort." 4

Finally, whatever had restrained Congress from projecting the government into the shipping business gave way before the com­bined weight of the extraordinary shipping costs, the lure of lucrative trading opportu­nities, and the growing national insecurity. After two years of politicking, spearheaded by Wilson, McAdoo, and their fellow Democrats in Congress, a shipping bill was

3 5

Ideas on Liberty • November 2003

passed, and the President signed it into law on September 7, 1916.

This law created the U.S. Shipping Board and empowered it to regulate the rates and practices of waterborne common carriers in foreign and interstate commerce and, through a subsidiary, to acquire, construct, and operate merchant vessels. The sub­sidiary, known as the Emergency Fleet Cor­poration, was created on April 16, 1917. During the war, executive orders, amend­ments to the act, and related legislation greatly extended the government's authority over the ocean-shipping industry. Govern­ment agencies gained the power to acquire vessels by requisition, commandeering, and seizure; to assign cargoes and routes; to regulate not only shipping and shipbuilding but also the wages, hours, and working conditions of laborers in those industries; and even to build residential housing, stores, and transport systems for them. By the autumn of 1918 "government control of merchant shipping in American service was absolute." 5

The Emergency Fleet Corporation's ship­yards had just begun to operate at a high rate when the war ended. Interested parties pressed the government to keep building, however, and it did so, in disregard of the long-term consequences, producing far more in 1919 than it had produced in 1918. Alto­gether, between 1917 and 1922, the govern­ment built more than 2,350 ships (hundreds of them nearly worthless wooden vessels) at a cost of more than $3 billion—approxi­mately one-tenth of the entire financial cost of the war. 6

Ship Sale The government now found itself in pos­

session of thousands of ships no longer needed for composing, in the words of a wartime slogan, "a bridge of ships" across the Atlantic. The Merchant Marine Act of 1920 authorized selling the ships to U.S. firms on easy terms and provided for subsi­dies to private operators. It also approved the operation of government shipping lines. The shipping business remained depressed

during the interwar years, however, and the government's ventures incurred chronic losses, which the taxpayers had to cover. Many of the ships rested at anchor—rusting monuments to government ineptitude and waste.

No salvation lay just beyond the horizon, however. In 1936 a new Merchant Marine Act authorized the U.S. Maritime Commis­sion to assume the Shipping Board's func­tions and set in motion another round of government subsidies, ship construction, and cartelization. When World War II began, the War Shipping Administration took complete control of all private shipping operations, while the Maritime Commission plunged into a massive ship-construction program that dwarfed its World War I antecedent, then left the government at the end of the war in possession of a gigantic fleet of unemployed and, for the most part, unemployable vessels, including thousands of poorly constructed, slow-moving Liberty ships.

Statutes enacted in 1950, 1961, and 1984 repositioned deck chairs on the government's shipping Titanic. Nowadays an independent regulatory agency called the Federal Mar­itime Commission oversees the cartels, while the Maritime Administration (in the Depart­ment of Transportation) channels taxpayer money into the pockets of favored parties by means of subsidies to shipbuilders and ship­ping lines, loan guarantees for construction and repairs in U.S. shipyards, and mainte­nance of the National Defense Reserve Fleet, among other boondoggles.7 •

1. Burton W. Folsom, Jr . , Entrepreneurs vs. The State (Reston, Va.: Young America's Foundation, 1987) , p. 14.

2. Wilson to O. G. Villard, September 4 , 1914 , quoted in Richard Sicotte, "Economic Crisis and Political Response: The Political Economy of the Shipping Act of 1 9 1 6 , " journal of Economic History, December 1999 , p. 8 7 1 .

3. Root to C. W. Wilson, February 4, 1915 , quoted in ibid., p. 862 .

4 . William Gibbs McAdoo, Crowded Years (Boston: Houghton Mifflin, 1931) , pp. 3 1 1 - 1 2 .

5. Edmund E. Day, "The American Merchant Fleet: A War Achievement, A Peace Problem," Quarterly Journal of Eco­nomics, August 1920 , p. 5 9 1 .

6. Ibid., pp. 5 9 2 - 9 3 ; U.S. Shipping Board reports cited by Sicotte, p. 8 6 1 .

7. See "Maritime Administration" and "Maritime Commis­sion, Federal," in A Historical Guide to the U.S. Government, ed. George Thomas Kurian (New York: Oxford University Press, 1998) , pp. 3 7 9 - 8 3 .

36

IDEAS ON LIBERTY

NOVEMBER 2 0 0 3

The Fallacies of by Thomas E. Woods, Jr.

n certain disaffected pockets of the politi­cal left and right, more and more voices can be heard on behalf of an economic and social system known as distributism.

According to the celebrated Catholic writers G. K. Chesterton and Hilaire Belloc, who popularized the idea in the early twentieth century, that social system is best in which "productive property" is widely dispersed rather than concentrated. They contend that the market order undermines community life and introduces an intolerable level of insecu­rity and anxiety into the economic life of the ordinary person. They would, therefore, limit business competition and implement a system of punitive taxation against firms that had attained what these writers consid­ered excessive economic concentration.

I do not for a moment doubt the good will and pure intentions of those who support distributism, and indeed I count some of them among my friends. My own view is that if someone wishes to live in relative self-sufficiency and to retreat, to a degree, from the division of labor, that is his decision. What I wish to do here is to suggest that the purported advantages of distributism, as well as the alleged iniquities of the market, have both been greatly exaggerated.

Let us consider Belloc's fundamental claim for distributism. As he sees it, distributism brings freedom:

Thomas Woods (woods@sunysuffolk.edu) holds a Ph.D. in history from Columbia University and is assistant professor of history at Suffolk Commu­nity College (SUNY) in Brentwood, New York.

Distributism

A family possessed of the means of pro­duction—the simplest form of which is the possession of land and of the imple­ments and capital for working the land— cannot be controlled by others. Of course, various producers specialize, and through exchange one with the other they become more or less interdependent, but still, each one can live "on his own": each one can stand out, if necessary, from pressure exercised against him by another. He can say: "If you will not take my surplus as against your surplus I shall be the poorer; but at least I can live." 1

For Belloc, then, the great advantage of dis­tributism is that it gives the household a sig­nificant measure of independence. A new introduction to his Essay on the Restoration of Property describes his view of "economic freedom" as something that "comes from the possession of sufficient productive property, such that a man need not depend upon his employer for a wage, but has rather to depend upon himself and his land, craft, tools, and trade for his sustenance."2 Belloc acknowl­edges in passing that of course anyone selling to others is in some way dependent on those others, thereby conceding that risk and uncer­tainty are unavoidable aspects of life rather than unique to a system of economic freedom. If the price and quality of his goods do not remain sufficiently competitive, he is surely bound to lose business. However, Belloc points out, the family can nevertheless live on its own, even if buyers refuse to purchase its

37

Ideas on Liberty • November 2003

surplus goods. They can live on what they themselves produce. At heart, then, Belloc's promise of security amounts to the distributist family's ability in the last resort to retreat altogether from the division of labor and live in a condition of self-sufficiency.

Yet the advantages of the division of labor are so clear that relatively few people have found Belloc's proposal attractive enough to have actually attempted to adopt it. Practi­cally anyone in the United States today who possesses the requisite knowledge and modest capital can acquire farmland and chase after the kind of self-sufficiency Belloc advocated. Producing their own necessities and in posses­sion of the means of production, so to speak, such a family would be utterly independent of employers or anyone else. They would proba­bly also enjoy a standard of living so depressed and intolerable as to throw the rationality of the entire enterprise into ques­tion. This certain outcome probably accounts for why the overwhelming majority of people choose to take their chances within the divi­sion of labor, balancing the risks from which this earthly life is never entirely secure against the unparalleled wealth and comfort they can enjoy by not retreating into semi-autarky.

Even granting the distributist premise that smaller businesses have been swallowed up by larger firms, that it is always preferable for a man to operate his own business rather than to work for another is by no means obvious. It may well be that a man is better able to care for his family precisely if he does not own his own business or work the back-breaking schedule of running his own farm, partially because he is not ruined if the enter­prise for which he works should have to close, and partially because he doubtless enjoys more leisure time that he can spend with his family than if he had the cares and responsibilities of his own business. Surely, therefore, we are dealing here with a matter for individual circumstances rather than crude generalization.

Deprived of Property The way distributists portray the situa­

tion, the wage earners of today are where

they are as a result of forces beyond their control; an ineluctable process of wealth concentration brought about by capitalism has deprived them of the possibility of own­ing "productive property" and avoiding the dependency that the wage relation implies. But the fact is, many people clearly prefer to be wage earners rather than business own­ers. Belloc and his followers are free to insult such people by calling them "wage slaves"— the distributists' favorite slur—but they have made an entirely rational choice. And it is a choice. As Fr. James Sadowsky observes,

The fact is that in the nineteenth century, when workers had far less disposable income than their counterparts today, a remarkable number of them became capi­talists. It is all too often the unwillingness to restrict consumption, a grasshopper attitude, that prevents workers like me from becoming capitalists. In our day we see especially among immigrants from Asia what is, for us, an amazing willing­ness to defer present consumption. We find these people living initially in condi­tions that we should judge to be absolutely impossible. Yet before we know it, they are operating successful businesses.3

As for the alleged insecurity with which workers must live, those who work for wages in fact enjoy a kind of security that is simply not acknowledged at all by distrib­utists—namely, that the worker receives his pay whether or not the goods toward whose production he contributes ever sell. It may be many months or years before they make it to market at all. During all that time, instead of suffering the anxieties and uncer­tainties of the independent craftsman or shop owner, the worker consistently earns his wage. He need not wait until—if ever— his product is actually sold in order to reap his benefit.

While Karl Marx claimed that any differ­ential between capitalist profit and wages paid to labor constituted "surplus value" and exploitation, the Austrian economist Eugen von Bohm-Bawerk attributed such

38

differentials to the time factor involved: rather than having to wait, say, the full year that must ordinarily elapse before the prod­uct on which he has worked is sold, the laborer can be paid immediately. Since pre­sent goods are preferred, other things equal, to future goods, the capitalist is entitled to his profit since he compensates his workers in the present for the production of goods that will be sold only in the future. The worker, on the other hand, prefers a lesser amount in the present to the greater amount he could have received in the future had he been willing to wait that long. He is clearly benefited by the wage relation.4

To be sure, the worker does labor under the very real uncertainty that he may lose his job. But this is inevitable due to technologi­cal improvements, changing tastes, new methods of production, and the like. The advent of the automobile meant that car­riage manufacturers would have to shift into some other line of production. The introduc­tion of fax machines and electronic mail must have cut into the business of couriers and package delivery. The net result of these changes is greater abundance and a higher standard of living, as fewer resources are now necessary to accomplish our ends, thereby freeing up resources for the produc­tion of goods that prior to these technologi­cal advances we could not have enjoyed.

What would the distributists have us do about these benign phenomena? Shall we establish a board of economic commissars to dictate which improvements will be permit­ted and which not? No one has a property right in a job. Put another way, no one has a right to demand that society continue to compensate him for performing a task peo­ple no longer require, whether he is a laborer or a shop owner. An economy based on the division of labor does not tolerate such a self-centered, anti-social attitude. Instead, it encourages us to satisfy the needs of our fellows.

Life Is Always Uncertain Moreover, it is profoundly misleading to

suggest that the "uncertainty" of the modern

The Fallacies of Distributism

39

worker is a uniquely reprehensible aspect of modern society rather than an inevitable aspect of life that has been with us since the beginning of time. Were peasants in pre-industrial France—who were, it should be recalled, among the freest, most independent peasantry in Europe—free of "hand-to-mouth uncertainty"? (Try telling that to a fourteenth-century mother who has just lost her fourth child before his first birthday, lives one bad harvest away from starvation, and resides in nearly intolerable squalor.) As late as the eighteenth century, all travelers commented on the appalling conditions of the French peasantry and the shockingly dilapidated state of rural housing. The same held true for many who sought employment in a trade. A Norman parish priest described the situation in 1774:

Day laborers, workmen, journeymen and all those whose occupation does not pro­vide for much more than food and cloth­ing are the ones who make beggars. As young men they work, and when by their work they have got themselves decent clothing and something to pay their wed­ding costs, they marry, raise a first child, have much trouble in raising two, and if a third comes along their work is no longer enough for food, and the expense. At such a time they do not hesitate to take up the beggar's staff and take to the road. 5

Taking up the beggar's staff and taking to the road: that is what was left to them. To say, therefore, that the free market led to the destruction of some previously existing, har­monious community life is simply to defy historical testimony. How could "commu­nity" exist when people were starving and forced to take to the road for sustenance? In what way is the alleged "independence" of farmers and craftsmen in evidence here? These appalling conditions applied at times to as much as one third of the French popu­lation—some eight million people.6

Nevertheless, Belloc claims that "the twin evils of Insecurity and Insufficiency" are inevitably associated with capitalism. "The main body of citizens, the Proletariat, are

Ideas on Liberty • N o v e m b e r 2003

not sufficiently clothed, housed and fed, and even their insufficient supply is unstable. They live in a perpetual anxiety." 7 This was not even true at the height of the Industrial Revolution, let alone in the early twentieth century when Belloc was writing.8 Practi­cally everyone acknowledges that the free market has created a greater abundance of necessities than previous ages could have dreamed possible. Imagine what the thirteenth-century peasant, the exemplar cited by so many distributists, would have thought of a society in which life expectancy was not 35 but 75, where everyone in society enjoyed dozens of changes of clean clothes, inexpen­sive food, shelter with amenities like heating and air conditioning—the list could go on a long, long time. The only way one could claim that capitalism actually brought about a retrogression of the physical well-being of the poorest would be if he were entirely ignorant of the conditions of the past.

More to Life Faced with this point, distributists fre­

quently shift to the rhetorically effective argument that there is more to life than material possessions, and that economic relations should be such that man is enabled to enjoy and cultivate higher tastes and virtues. This is a straw man, of course, since hardly anyone arguing in favor of the mar­ket suggests that material possessions are ends in themselves or bring the highest kind of fulfillment. Furthermore, it is precisely the wealth that the market creates and the leisure it makes possible that make the enjoyment of higher things practicable in the first place. A man living at the level of bare subsistence is not likely to be able to culti­vate an interest in opera, or Renaissance painting, or nineteenth-century literature.

Indeed, the objection of materialism only reveals the incoherence of the anti-market position, which began as an argument that the market systematically exploited and impoverished the laborer. When the over­whelming weight of the evidence shows this opinion to be ludicrously at odds with real­ity, the accusation shifts ground. With the

superiority of economic freedom all but impossible to deny, and the amazing abun­dance which we owe to such a social order no longer a matter of serious dispute, we are now told that even to think in such terms reveals an excessive attachment to the things of this world.

The net result of all of the obstacles to prosperity inherent in distributism must be a far poorer society. Now Belloc and his fol­lowers are free to argue that impoverishment is a small price to pay for economic inde­pendence. But they have no right to accuse anyone of moral perversity for remaining unconvinced. Yes, there is "insecurity" in a free society, in that no one has a right to demand that his fellow men continue to pay him for performing a task they have indi­cated they no longer require. This is a fea­ture of any economic system—unless we guarantee every business owner a share of the market regardless of his abilities, cour­tesy toward the customer, and responsive­ness to the needs of society. At the same time, the "insecurity" of the free society is more than compensated for by the unique security enjoyed by members of such a soci­ety vis-a-vis members of a distributist soci­ety, in the form of fantastic, unheard-of lev­els of wealth, the benefits of the division of labor, and the large-scale social cooperation it makes possible. An eleventh-century serf enjoyed a great deal of job security, but few envy him his position.

Every one of the agricultural revolutions through which the Western world has passed since the ninth century has involved the introduction of new farming implements, methods, or fertilizers whose net result has been that fewer people are needed to pro­duce the same amount of output. Naturally, these advances meant the displacement of some people, as the economy adjusted to new circumstances. Would Belloc have per­mitted any of these agricultural revolutions to occur? After all, they led to a great deal of what Belloc calls insecurity. But they also made possible the sheer survival of far more people, now that food could be more readily produced. The same is true of any innova­tion that increases the productivity of agri-

40

The Fallacies of Distributism

cultural labor: it makes possible a consider­able increase in population. Can this consid­eration be weighed against Belloc's desire for stability? We are not told.

Moreover, it is not clear what precisely is so "secure" about deliberately spurning the material benefits of the division of labor, which are not inconsiderable, in favor of the kind of self-sufficiency that Belloc describes. As Belloc and other distributists have said, the self-sufficient man, while certainly bene­fiting from specialization and exchange with others, can if necessary rely on himself alone for the things he needs. That is certainly true, but that would make Robinson Crusoe one of the most secure men who ever lived, since he was in no danger (until Friday came along, that is) of being lured into the temp­tations of the division of labor and thereby finding himself in a state of interdependence with his fellows.

The man who relinquishes so many of the benefits of the division of labor, moreover, invites a level of insecurity with which the so-called "wage slave" of capitalism need never be confronted. What does Belloc's iso­lated farmer do during a drought? By the time normal channels of trade are hastily reopened, it may be too late. What consola­tion will such a family be afforded by reas­suring themselves at such a time that at least they are not "wage slaves"? Who in the pre­sent United States suffers from such fears?

Belloc would use state policy to keep large manufacturers in check. But in the market­place a crucial check already exists against a wealthy manufacturer: he will be able to maintain his wealth only to the extent that he makes prudent investments and continues to satisfy the needs of his fellow man. This is what Ludwig von Mises meant when he said that ownership of the means of production "is not a privilege, but a social liability":

Capitalists and landowners are compelled to employ their property for the best pos­sible satisfaction of the consumers. If they are slow and inept in the performance of their duties, they are penalized by losses. If they do not learn the lesson and do not

reform their conduct of affairs, they lose their wealth. No investment is safe for­ever. He who does not use his property in serving the consumers in the most efficient way is doomed to failure. There is no room left for people who would like to enjoy their fortunes in idleness and thoughtlessness. The proprietor must aim to invest his funds in such a way that prin­cipal and yield are at least not impaired.9

What more salutary check against arbi­trariness could exist than that? The state, on the other hand, which Belloc proposes to use to establish and maintain his own system, is insulated from the consequences of arbitrari­ness, since it never has to pass any such market test. In fact, the worse a government agency performs, the higher its budget tends to be the following year. This is one reason so many of us are loath to entrust our well-being to such an institution.

Let us count our blessings. Thanks to industrial society, few of us live in fear of dying of the countless diseases since tamed by medical science. We enjoy sanitary condi­tions, personal comforts, and opportunities that the greatest kings of Europe could scarcely have imagined. Half of our children do not die by age five. People are free to con­sider these things trivial or unimpressive if they wish, but the judgment of mankind appears to run in the other direction. •

1. Hilaire Belloc, Economics for Helen (London: J . W. Arrowsmith, 1924) , p. 125 .

2 . Editors of IHS Press, "Introduction," in Hilaire Belloc, An Essay on the Restoration of Property (Norfolk, Va.: IHS Press, 2 0 0 2 [1936]) , p. 12.

3. James A. Sadowsky, "Capitalism, Ethics, and Classical Catholic Social Doctrine," This World, Fall 1983 , p. 123 .

4 . Eugen von Bohm-Bawerk, Capital and Interest, 3 vols., trans. George D. Huncke and Hans F. Sennholz (South Holland, 111.: Libertarian Press, 1959) , vol. 1, p. 2 6 9 ; see also Hans-Hermann Hoppe, The Economics and Ethics of Private Prop­erty (Boston: Kluwer Academic Publishers, 1993) , pp. 9 6 - 9 7 .

5. Olwen H. Hufton, The Poor of Eighteenth Century France, 1750-1789 (Oxford: Oxford University Press, 1974) , p. 11 .

6. William Doyle, The Oxford History of the French Revo­lution (Oxford: Oxford University Press, 1989) , p. 14.

7. Belloc, Essay, p. 2 8 . 8. Thomas E. Woods, Jr . , "A Myth Shattered: Mises, Hayek,

and the Industrial Revolution," Ideas on Liberty, November 2 0 0 1 , pp. 4 2 - 4 4 .

9. Ludwig von Mises, Human Action, Scholar's Edition (Auburn, Ala: Ludwig von Mises Institute, 1998 [1949]) , p. 3 0 8 . I owe this reference to Professor Jeffrey Herbener.

41

BOOKS Adam Smith's Marketplace of Life by James R. Otteson Cambridge University Press • 2002 • 338 pages • $70.00 hardcover; $26.00 paperback

Reviewed by Robert Batemarco

One of the puzzles confronting students of the history of economic thought is the apparent inconsistency of the two

masterworks of Adam Smith: The Theory of Moral Sentiments and An Inquiry into the Nature and Causes of the Wealth of Nations. In the former, Smith gives an account of how benevolence plays a central role in shaping individuals' moral sensibili­ties, while in the latter he contends that eco­nomic prosperity can prevail with nary a trace of benevolence.

James Otteson, associate professor of phi­losophy at the University of Alabama, did not find conventional explanations of this disparity satisfactory. Where most students of this issue tried to explain why The Wealth of Nations differed from The Theory of Moral Sentiments, Otteson looked for what in the latter was the same as in the former. In Adam Smith's Marketplace of Life, his will­ingness to think outside the box led him to identify the common framework that inte­grates both these works in their parallel adjustment processes.

In the economic order, most readers of Ideas on Liberty are more than familiar with Smith's notion that prices are guides to mutually beneficial exchanges and desirable allocations of resources. His vision of auto­matic adjustment is central to modern eco­nomics. In the moral realm, he used a paral­lel construction to explain people's moral judgments.

Otteson sees Smith starting from the premise that people have an innate desire for their sentiments to correspond with those of others, which he calls "mutual sympathy of sentiments." To accomplish this, people must judge their own actions the way a fair-

minded observer with no vested interest in the outcome of those actions would. This is Smith's imaginary "impartial spectator." Following the dictates of this "impartial spectator" is a kind of adjustment mecha­nism driving us toward a moral consensus in much the same way that following the price system permits markets to clear—the better known "Invisible Hand."

Smith sees this "impartial spectator" as able to permit us to strike a balance between benevolence and self-interest against a back­drop of justice. Whereas justice is the pre­requisite for any kind of ordered society and is thus always commanded by the impartial spectator, benevolence, which goes beyond justice, is only called for contingently. As Otteson puts it, "Smith argued that the impartial spectator approves of an ascending degree of benevolence towards others in direct relation to our knowledge of and familiarity with them." According to this "familiarity principle," behavior consistent with the letter of the law that would be quite proper in dealing with strangers would be scandalous if applied to family and friends.

Since we conduct most of our economic transactions with strangers or near-strangers, the premises set forth in The The­ory of Moral Sentiments lead directly to the conclusion that self-interest properly trumps benevolence in the economic realm depicted in The Wealth of Nations. Thus the two books, rather than contradicting each other, share a common core. Otteson's original contribution is to have identified that core and how Smith saw it playing out in the moral realm.

In making this contribution, he displays virtuoso scholarship. Otteson assiduously examines the points of view of others who have studied this issue without ever letting the reader lose sight of his own argu­ment. Moreover, for nearly every question this thought-provoking work raised in the mind of this reader, the author provided a satisfying answer within a couple of pages. To top it off, Otteson spells out what makes his inquiry more than a mere exploration of arcane issues—namely, that it gives us compelling "reasons to spread

42

human freedom as widely as possible." Not only will Smith scholars find much

food for thought in these pages, but the new­comer to the works of Adam Smith will not leave the table intellectually undernourished. The author lets his arguments build systemat­ically, almost in the manner of a programmed text, and provides recaps of his main points that leave no room for confusion. If Professor Otteson teaches the way he writes, his stu­dents at the University of Alabama are getting more than their money's worth.

One big question this work does not fully answer is how reliable Smith's impartial spectator is at yielding an ethic consistent with liberty. In an age where most people have been brainwashed into believing the opportunity to feed at the government trough is a God-given right, it is doubtful that everyman's impartial spectator would today recoil from participation in the plun­der disguised by a veneer of legality, as so many would have 150 years ago. So while Otteson has solved one interesting prob­lem, an even more important one awaits a solution. •

Robert Batemarco is a vice president of a market­ing research firm in New York City and teaches economics at Pace University.

The Great Tax Wars: Lincoln to Wilson— The Fierce Battles over Money and Power that Transformed the Nation by Steven R. Weisman Simon & Schuster • 2002 • 419 pages • $27.00

Reviewed by Burton W. Folsom, Jr.

r he Great Tax Wars describes the 60-year battle (from Presidents Lincoln to Wil­son) that led to the permanent federal

income tax. As important as the income tax is to explaining the rise of big government in the twentieth century, we have regrettably few books on why and how the income tax came into existence. Weisman's book, there­fore, is welcome even though the author's analysis is often unsatisfying.

On the positive side, his account is infor­

mative and he sprinkles his narrative with interesting biographical sketches of key fig­ures in the tax debate. If you're interested in the historical battle over the constitutionality and desirability of the federal income tax, Weisman's book covers it well. On the nega­tive side, though, he is blinded by statist pre­suppositions on the role of government and never seriously questions the conventional liberal/progressive view of American history.

At least he announces his biases at the beginning. "The income tax is . . . a kind of leveler," Weisman writes. "[I]t softened the edges of the distribution of wealth in the interest of justice and fairness—and among progressives, in the interest of maintaining a certain level of social stability." The income tax, in Weisman's view, is "desperately needed to underscore the idea of social jus­tice in the distribution of rewards and sacri­fice in our society." With this framework, Weisman depicts those who favored an income tax, especially a progressive tax, as heroic and courageous; their opponents are labeled "ultraconservative" defenders of entrenched, selfish, and wealthy interests. It evidently never occurs to him that lusting after the income of individuals in order to lavish it on politically driven programs might be the quintessence of greed.

Weisman's narrow view of tax history leads to three problems. The first is impre­cise definitions. He talks constantly of the need for a "fair" income tax that targets those with the ability to pay. But as an advo­cate of a progressive tax, he never can say with any precision what a "fair" top rate would be—7 percent (the 1913 rate), 77 per­cent (the 1918 rate), or 100 percent (Presi­dent Roosevelt's advocated rate in 1942 on all income over $25,000).

Weisman's second problem is that he is so anxious to show a need for an income tax after the Civil War that he misses the dan­gers to liberty that existed when the tax was in place during the war. Weisman expresses no alarm that George Boutwell, the first commissioner of the IRS, concealed revenue, thus creating a shortfall that undermined President Grant's case that the income tax was no longer needed. The power to tax, as

43

Ideas on Liberty • November 2003

the Supreme Court insisted long before the income tax, is the power to destroy: It was only another step to Franklin Roosevelt and his use of the IRS to investigate political opponents such as Huey Long and William Randolph Hearst. The dark side of the tax bureaucracy had manifested itself long before the Sixteenth Amendment was enacted, but Weisman turns a blind eye to it.

The third problem with the book is that Weisman never views taxation as dynamic— that is, lower tax rates can yield larger rev­enues. He stops his story at 1920, when the top rate was over 70 percent. What that misses is the Mellon tax cuts, which during the 1920s slashed all rates by about two-thirds and resulted in sharply increased rev­enue from the income tax—entrepreneurs, under the lower rates, were encouraged to invent products, from radios to air condi­tioners.

Finally, Weisman, who is a journalist with the New York Times, makes a variety of his­torical errors. The top tax rate after the rev­enue act of 1932 was 63 percent, not 55 per­cent; the top rate after Roosevelt's tax bill of 1935 was jacked up to 79 percent, not 75 percent. Also, Albert Fall was U.S. Senator from New Mexico, not Nebraska, as Weis­man insists.

The Great Tax Wars has some useful information on the history of a neglected subject, but readers must separate its history from its statist philosophizing. A recent and better book on the subject is W. Elliot Brownlee's Federal Taxation in America. •

Burton Folsom is Charles Kline Professor of History at Hillsdale College, and the author of The Myth of the Robber Barons, now in its fourth edition.

Pieces of Eight by Edwin Vieira, Jr. Sheridan Books • 2002 • 1,666 pages (two vols.) • $49.95

Reviewed by George C. Leef

T ake out your wallet and examine the rec­tangular pieces of greenish paper in it. You'll probably first think "money,"

then "dollars." Looking closely, you see the words "Federal Reserve Note" and "legal tender." You have perfect confidence that you can exchange the pieces of paper for valuable goods and services. Whether those paper bills have any constitutional validity certainly does not cross your mind. The gov­ernment prints the stuff, so it must be legit, right?

If, however, you have read Edwin Vieira's monumental work on our monetary system, you would look quite differently on the money in your wallet. With remarkable breadth and depth of scholarship, lawyer and constitutional expert Vieira has given us a treatise on, as the subtitle of this two-vol­ume work says, "The monetary powers and disabilities of the United States Constitu­tion." First published in 1983, this is a sec­ond, expanded edition, beautifully printed and bound. The author has woven together constitutional provisions, statutes, court decisions, and his own sharp legal analysis into an encyclopedic work on our monetary system that should be the starting point for anyone with an interest in the chasm between the system we now have and that which the Constitution ordained.

What is the Constitution's definition of a "dollar?" For Vieira, that is the essential first question. The answer, under Article I, Sec­tion 9, Clause 1, is that it is a coin contain­ing 371.25 grains of fine silver. How odd that seems. But that was the weight of the most widely circulated coin in the colonies and early United States. The coin was the Spanish milled dollar, commonly known as a "Piece of Eight"—hence the title of the work. Vieira writes that silver coins of 371.25 grains are the lawful foundation of our monetary system, "not any gold coin or base-metallic coin, let alone any paper cur­rency, be it the first legal-tender United States notes (the "Greenbacks"), the later National Bank Notes, or today's Federal Reserve Notes. And, the Constitution never having been amended in this particular since 1788, that meaning remains legally control­ling today."

Or at least it should be. What Vieira sub­sequently shows is that the Constitution's

44

Books

monetary strictures (like its strictures in so many other areas) have been evaded and destroyed by politicians and that the Supreme Court has chosen to turn a blind eye to the monetary shenanigans of Con­gress. The surprising conclusion of Pieces of Eight is that there is no legal authority for our present system of irredeemable fiat cur­rency. Vieira maintains that "To introduce the FRN (federal reserve note) as a new-paper currency in 1913, the government had to tie it by a right of redemption to the cir­culating money of that day, gold coin. And then, to transmogrify the FRN into a cur­rency fit for limitless inflation, the govern­ment had to cut that tie to gold (and silver as well). . . . If the FRNs were not 'dollars' when they explicitly promised to pay in gold, they did not magically become 'dollars' when they stopped promising to pay in any­thing at all, and statutorily can be redeemed in nothing better than base-metallic coin."

Inflation. There's the key. The Constitu­tion gave the United States a monetary sys­tem under which money could be coined by the government, but not created out of thin air. Once they had been freed from the Con­stitution's restraints, politicians were able to spend money without the unpopular need to levy taxes. Furthermore, absent the mone­tary mismanagement of our central bank— the Federal Reserve—our economy would have been spared the boom-and-bust cycles that we have endured at its clumsy hands. In the court of history, those who planned and acquiesced in the destruction of the Consti­tution's monetary framework have much to answer for.

There is no part of this fascinating story that Vieira doesn't cover in penetrating detail. The precise meaning of the relevant constitutional provisions, the several Coinage Acts of the early 1800s, the First and Second Banks of the United States, the Supreme Court's blunder in sustaining the constitutionality of legal tender U.S. notes, the institution of the Federal Reserve, Franklin Roosevelt's gold seizure, the sever­ing of the final ties to redeemability in gold and silver—all that and far more is covered in these volumes.

People who fancy themselves as "realists" might snicker and say, "So what? We can't go back to an antique system with people carrying around silver dollars to make their purchases." Vieira's task here is not to set forth the ways in which our monetary sys­tem could have evolved to suit modern com­mercial needs without destroying the consti­tutional base, but other scholars have done so. The problem is not that a modern econ­omy is impossible without government mon­etary control, but that the politicians will fight like mad to keep the power they have taken illegitimately.

Pieces of Eight is an indispensable work for anyone who believes in upholding the Constitution. •

George Leef is book review editor of Ideas on Liberty.

Terrorism and Tyranny: Trampling Freedom, Justice, and Peace to Rid the World of Evil by James Bovard Palgrave Macmillan • 2003 • 440 pages • $26.95

Reviewed by Richard M. Ebeling

W ars have always seen a growth in state power. Under the appeal of "national security" and "wartime emergency,"

individual liberties have been abridged or abolished, property rights have been weak­ened or abrogated, accumulated wealth has been heavily taxed or confiscated, and free­dom of enterprise and trade have been severely constrained or completely placed under government control and planning.

Most tragically, the young men of society have been sent into battle, often under illu­sions of national glory and a false sense of patriotism. Many of these young men do not return home; others return with wounds that leave them and their families ruined and scarred for life.

Court historians soon fill the pages of their books with versions of the war that present the political leaders of their country

4 5

Ideas on Liberty • November 2003

as Olympian-like gods, selfless beings who only thought and acted for "the good of the nation." Every loss of personal freedom, every abridgment of economic liberty, and every expansion of government power is rationalized away as having been necessary and indeed essential for the national interest during that time of crisis.

And when many of these freedoms are not fully restored when the wartime emergency ends, those same apologists for political power then babble on about "new times" and "changing circumstances" and a "less simple world" that cannot afford the "lux­ury" of human liberty to the same extent it existed in "days gone by." In the meantime, freedom has been lost and government has grown in power and control.

Before these court historians and apolo­gists for state power can completely domi­nate the shelves in the bookstores, James Bovard has waded in to challenge the ratio­nales for the most recent losses of freedom and to show the consequences. His new book, Terrorism and Tyranny, is like his many other exposes of government power and corruption: clear, dispassionate, factual, and heavily documented. He is the Joe Fri­day of political analysis: Just the facts, ma'am. And the facts will make your blood boil.

Bovard begins by summarizing the extent to which the government's own foreign-pol­icy and security incompetence set the stage for the tragic events of September 11, 2001 . To cover up their own failures and create an image of "doing something," government investigative agencies, even before the dust had cleared where the Trade Towers once stood, undertook dragnets through Arab-American communities. Hundreds of people were rounded up and held for months with­out charges and without access to lawyers or family members; some were physically abused. Virtually all were found to have had no contacts or connections with suspected terrorists.

The USA Patriot Act, Bovard explains, was rushed through Congress with little critical thought about the extent to which it danger­

ously added to government's intrusive pow­ers. The result of this and related legislation: greater wiretapping discretion, increased asset-forfeiture authority, expanded privacy and property invasions, and reduced citizen recourse to fight these violations of freedom. And as always, Bovard makes these abstrac­tions come alive with numerous examples of how many ordinary, innocent people have been victimized in the spider's web of these new controls.

He also offers an insightful and valuable analysis of the U. S. government's concep­tion of "terrorism." In essence, it amounts to any attempt, by any group, for any reason, to take up arms against the existing govern­ment in any country in the world. But the problem is that in many parts of our world, governments are not democratic and are often in the hands of corrupt tyrants and violators of personal and economic liberty. Thus by the Bush Administration's definition of terrorism, all the American Founding Fathers should be considered "terrorists" since they took up arms against the "legiti­mate" British government.

Bovard also effectively discusses what he calls the "bastardizing of freedom." In the wake of 9/11, the U.S. government wrapped everything it did in an a version of George Orwell's "newspeak." Political control became personal freedom; government intrusiveness became security in one's person and property; violations of the writ of habeas corpus became protection of civil lib­erty; and trampling on constitutional restraints became preserving the American way of life.

Bovard does not deny the need for govern­ment to protect us from violent invaders, and he strongly believes that those responsible for the events of 9/11 should be brought to jus­tice. But he is deeply concerned that in the name of securing life, liberty, and property, that same government is destroying the free­doms it is supposed to protect. What will we have gained if the "war on terrorism" costs us what made America great? •

Richard Ebeling is president of FEE.

46

The Pursuit of Happiness

IDEAS ON LIBERTY

NOVEMBER 2 0 0 3

W hether it's Nation of Islam Minis­ter Louis Farrakhan leading the Million-Man March, anti-WTO (World Trade Organization) pro­

testers, or AIDS activists, we're frequently treated to the chant demanding "People Before Profits." Since profit demagoguery is a deceptively appealing tool used by scoundrels everywhere, let's demystify the concept of profits.

Let's first get its definition out of the way. Profits represent the residual claim earned by entrepreneurs. It's what's left after all other costs—wages, rent, interest—have been paid. The entrepreneur is generally seen as the person who takes risks, innovates, and makes decisions. It's important to recognize that profits are a cost of business just as are payments to labor, land, and capital. If wages, rent, and interest are not paid, labor, land, and capital will not be offered; simi­larly, if profit is not paid, entrepreneurs won't be seen either.

Roughly six cents of each dollar compa­nies take in represent after-tax profits. By far, wages are the largest part of that dollar, representing about 60 cents. As percentages of 2002 national income, after-tax profits represented about 5 percent and wages about 71 percent. Far more important than simple statistics about the magnitude of profits is the role played by profits, namely, that of guiding resources to their highest-

Walter Williams is the John M. Olin Distinguished Professor of Economics at George Mason Univer­sity in Fairfax, Virginia.

by Walter E. Williams

valued uses, determined not by some tyrant but by ordinary people's wants and desires. Let's discuss just a few examples.

Remember when Coca-Cola introduced the "new" Coke? Pepsi president Roger Enrico called it "the Edsel of the 80s," rep­resenting one of the greatest marketing deba­cles of the decade. Who made the Coca-Cola Company bring back the old Coke? Was it Congress, the courts, the President, or other government officials who claim to have our interests at heart? No way. It was the specter of negative profits (losses) that convinced Coca-Cola to bring back the old Coke. Thus one role of profits is to discover what con­sumers want. If producers make mistakes, profits work to correct them.

After the 1992 massive destruction caused by Hurricane Andrew, South Florida stores sold sheets of plywood for twice the price it had sold for prior to the storm. Escalating plywood prices brought charges of price-gouging and prosecutory threats. But look what higher prices and the potential for windfall profits did. Plywood destined to be shipped to the Midwest, West, and North­east suddenly was rerouted to South Florida. Lumber mills increased production. Truck­ers and other workers worked overtime so as to increase the availability of plywood and other construction materials to Floridians. Rising plywood prices meant something else. All that plywood heading south meant ply­wood prices rose in other locations, thus dis­couraging "less valued" uses of plywood, such as home-improvement projects. After all, rebuilding and repairing destroyed

People Before Profits

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Ideas on Liberty • November 2003

homes is a "higher valued" use of plywood. What caused these market participants to

do what was in the social interest, namely, sacrifice or postpone alternative uses for ply­wood? The answer reveals perhaps the most wonderful feature of this process: rising prices and opportunities for higher profits encouraged people to do voluntarily what was in the social interest: help their fellow man recover from a disaster.

Profits also force producers to behave themselves. If producers waste inputs, their production costs will be higher. To cover their cost, they'll charge prices higher than what consumers are willing to pay. After a while the company will make unsustainable losses (negative profits) and go out of busi­ness. As a result, the company's resources will become available to someone else who'll put them to wiser use. This process is short-circuited if government offers bailouts in the forms of guaranteed loans, subsidies, or restrictions on competitive products from abroad, such as tariffs and import quotas. Government "help" enables failing compa­nies to continue squandering resources.

If we care about people's wants, rather than beating up on profit-making organiza­tions we should pay more attention to government-owned nonprofit organizations. Government schools are a good example.

Many squander resources and produce a shoddy product, while administrators, teachers, and staff earn higher pay and perks, and customers (taxpayers) are increasingly burdened. Unlike other produc­ers, educationists don't face the rigors of the profit discipline and hence they're not as accountable.

How about the U.S. Postal Service? They also provide shoddy and surly services, but the management and workers receive increasingly higher wages, while customers pay higher and higher prices. Again, wishes of customers can be safely ignored because there's no bottom-line discipline of profits.

Here's Williams's law: whenever the profit incentive is missing, the probability that peo­ple's wants can be safely ignored is the great­est. It's not just the post office and schools, but delivery of police services and garbage collection as well. If a poll were taken asking people what services they are most satisfied with and those they are most dissatisfied with, for-profit organizations (supermarkets, computer companies, and video stores) would dominate the first list while nonprofit organizations (schools, post office, and offices of motor-vehicle registration) would dominate the latter list. In a free economy, the pursuit of profits and serving people are one and the same. •

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